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Mutual Funds

How to Pick a Target Fund

John Hancock official Bob Boyda warns investors against getting hung up On every little holding inside a target fund. "Getting the big stuff right is more important than the little fine-tuning," he says.

We agree. When you evaluate target-date funds, you want to focus on the big stuff: Are they broadly diversified? Are expenses low? And, of course, how have they performed?

Given these criteria, T. Rowe Price target funds remain our favorites, with Fidelity and Vanguard close runner-ups. The Price funds lead the performance derby occasionally, but their biggest selling point is that they score well in all three key areas. Price has kept up with the times by expanding the types of assets its funds hold, but it hasn't gone crazy loading up on foreign stocks.

One variable that fund companies can control is expenses, which are crucial when you invest over long periods. Consider $100,000 invested in two target funds for 20 years. Both funds earn 11% before fees. One fund charges 2% a year, so you end up with $560,000. The second, charging 1% a year, grows to $673,000. The difference isn't small potatoes.


Target-date-fund expenses range from super-low -- Vanguard's funds charge 0.19% to 0.21% annually -- to ridiculously expensive. Some Wells Fargo funds charge nearly 2% annually (that figure includes 12b-1 fees of 0.75% per year that are used to pay the brokers who sell the funds).

T. Rowe Price's annual fees range from 0.60% to 0.74%. Fees for Fidelity's Freedom funds range from 0.57% to 0.84% a year. (Neither Price, Fidelity nor Vanguard charges any fees beyond the expenses of the underlying funds; by contrast, Wells Fargo charges an additional 0.25% for its Advantage funds; and Seligman, which uses exchange-traded funds in its target series, charges an additional 0.50% for management. American Century levies an additional 0.20% "administrative" fee.)

As for diversification, Price's retirement portfolios hold about ten funds. When target-date funds first came out, some observers criticized Price for being too aggressive. Now many other fund families have come around to its way of thinking. But Price makes a compelling case that its mix -- starting with 90% in stocks for target dates decades away to about 40% in stocks for funds when they reach their target -- is aggressive enough.

Meanwhile, what do you do if your employer's retirement plan contains only high-cost or poorly performing target funds? You can raise a ruckus with your benefits department, but until it sees the light, consider contributing enough to get the maximum company match, then invest in better target funds on your own outside the plan.


The best of the target-date retirement funds

Funds from the no-load families listed below charge below-average fees and have produced good returns. The results of their 2015 and 2035 funds compare favorably with the three-year 9.7% annualized gain of the S&P 500 index and the 8.4% return of the average balanced fund.

Fund Annualized 3-yr. Return* % in U.S. Stocks % in Foreign Stocks
American Century Livestrong 2015 INV (ARNIX) 8.8% 44% 8%
Fidelity Freedom 2015 (FFVFX) 9.4% 45% 12%
T. Rowe Price Retirement 2015 (TRRGX) 10.3% 54% 15%
Vanguard Target Retirement 2015 (VTXVX) 8.9% 52% 13%
American Century Livestrong 2035 Inv (ARYAX) 11.6% 62% 15%
Fidelity Freedon 2035 (FFTHX) 11.7% 66% 17%
T. Rowe Price Retirement 2035 (TRRJX) 11.9% 66% 22%
Vanguard Target Retirement 2035 (VTTHX) 11% 72% 19%
*To December 3. Sources: Fund companies, Morningstar Inc.