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By Adam Zoll and Josh Charlson, CFA | 01-24-2014 11:00 AM

Target-Date Funds: Fact Versus Fiction

Morningstar senior fund analyst Josh Charlson sets the record straight on common target-date misconceptions.

Adam Zoll: We are talking about target-date funds as part of Morningstar's 401(k) Week special report. Joining me is Josh Charlson, a senior fund analyst with Morningstar.

Josh, let's look at a few fact-versus-fiction items when it comes to target-date funds. The first one, people may think all target-date funds are pretty much the same: fact or fiction?

Josh Charlson: That is fiction. This is something where you want to do your due diligence, even if you are being defaulted into a target-date fund [in your 401(k) plan]. We are going to see differences in target-date funds in the glide path, the asset allocation. You are going to see the biggest difference as these funds get closer to retirement.

When we talked about the 2045 or the 2050 funds, you are going to see a fairly narrow range of that equity allocation, anywhere from 85% to 95%, with a 90% average. When we get down to the funds that are close to retirement, a couple of years away from retirement, that range is more like from 20% to 60%, or even 65%. So there can be some really significant differences in how that will affect performance. You want to pay attention to that.

Zoll: Let's talk about which target-date series Morningstar likes in particular. Can you give us some names?

Charlson: We rate target-dates as a series, because we are looking at the whole collective of funds along the glide path. When we talk about more aggressive target-date series, more equity heavy, T. Rowe Price is one of the best. That's a Gold-rated series of funds.

Another that we like--particularly if you want to go for the lower-cost, passive approach to target-date funds--Vanguard is also Gold rated. It has a great asset allocation team, expert indexers.

If we are talking about a more conservative glide path that gets a little more conservative earlier as we get toward retirement, JPMorgan has a very good series, and American Century. Both are Morningstar medalists. ( Click here to see all Morningstar Medalist target-date funds.)

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