Target-Date Funds Are Not Created Equal

Stock-bond breakdowns can make a big difference in the long run.

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Although target-date funds all pitch the same idea—set it and forget it—their composition varies greatly, depending on the sponsor. These seemingly small differences can translate to big differences in risk and return, reports the Motley Fool. The site recently published a handy guide to the stock and bond breakdowns of target-date funds from three major fund companies: Fidelity, T. Rowe Price, and Vanguard. It also estimated what a $10,000 investment in each of these funds might return over a 40-year time period, based on historical averages for stocks and bonds.

The results were interesting. Vanguard, which has the lowest expenses and the most aggressive allocation, would turn a $10,000 investment into $446,645 in 40 years, according to Motley Fool. Meanwhile, Fidelity would return $358,170, and T. Rowe Price would yield $263,513.

Of course, investors should look at more than 40-year simulations before choosing a target-date fund. The Fool's analysis doesn't mention what types of stock funds (for example, foreign versus domestic) or bond funds make up each target-date fund, or whether they include any alternative investment classes. As it turns out, target-date funds aren't totally hands-off investments: They require a little legwork in the research department.