BOSTON (TheStreet) -- Investors may be losing as much as $1.3 billion a year because of target-date funds' underperforming investments and fees, according to a study by Georgia State University.
Conflicts of interest can arise when fund managers turn to their own companies' mutual funds for employee retirement plans. Target-date funds tend to select high-fee and underperforming funds, resulting in the worst-case scenario seen in research by Vallapuzha Sandhya, a doctoral student of finance at Georgia's J. Mack Robinson College of Business, data from 2003 to 2008 show.
With target-date funds, investors choose a retirement year and let the fund automatically adjust a portfolio's exposure to stocks and bonds over time. Younger investors will likely have more aggressive portfolios, with upward of 90% devoted to stocks. In theory, the portfolios become more conservative as participants age. Target-date funds are typically made up of other stocks and bond mutual funds.
There's an alternative that deserves greater consideration, Sandhya says: "Balanced funds" that can do the job as well, if not better, by mixing stocks and bonds. Unlike target-date funds, balanced funds maintain their allocations, rather than adjusting for risk profile or market conditions. Popular examples include Vanguard Group's Vanguard Wellington (VWELX) , T. Rowe Price's (TROW) T. Rowe Price Personal Strategy Balanced (TRPBX) and Wells Fargo's (WFC) Wells Fargo Advantage WealthBuilder Growth Balanced (WBGBX) .
But traditional target-date funds remain attractive. Assets in target-date funds have skyrocketed from just under $2 billion in 1997 to $270 billion last month, according to the Securities and Exchange Commission.