JohnPrestbo

NEW YORK (MarketWatch) — Target-date funds appeal to a lot of people — although a “set it and forget it” approach is inappropriate for any investment — but exchange-traded funds probably aren’t the best way to own them.

The idea of target-date funds couldn’t be simpler: Pick a fund with a year in its name that corresponds to when you’ll likely retire. (The funds typically are launched in five-year intervals, now stretching out to 2055 or 2060.) When that date is far off, the fund is heavy in stocks and focuses on growing assets.

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As the date draws nearer, the fund holds less in stocks and more in bonds and cash, focusing on capital preservation. After the date passes, the fund holds mostly bonds, a small amount in stocks and a lot more cash to facilitate withdrawals for retirement living expenses.

This concept takes a lot of portfolio-management duties off investors’ hands, especially at a time of life when rejiggering asset allocations may not be a welcome, or even manageable, task. However, it typically demands that investors place a lot of trust in the company whose fund they have chosen.

Most target-date funds are “funds of funds” that funnel investors’ money into some of the company’s other mutual funds or ETFs. While they list the funds they could invest in, many don’t reveal exactly how much is where at any given time. Those that do disclose such data tend to report it as of the end of the prior year or, at best, the most recent quarter.

So, the mix can and does change without notice. This raises at least the possibility the company could be attending more closely to its underlying funds’ asset flows than to target-date customers’ goals.

Many if not most fund companies use their actively managed funds to underlie the target-date products. This, plus the changing mix, which is “active” in itself, means the target-date fund’s risk level could vary beyond what the asset allocation would suggest.

Regarding which, the allocations themselves usually are specified only after the fact, if at all. The “glide path” the fund follows from aggressive to conservative allocations over the years is rarely shown — some fund companies consider it proprietary — so investors can’t get a prospective look at how their money will be handled.

Someone shopping for a target-date fund could devise ballpark estimates of asset allocations down the road by checking existing funds with time-to-target periods corresponding to the preview they want. That’s a lot of work for an investment product claiming to make life easier.

Indexed target-date funds are few and far between. Some fund companies include an index fund or two in their menu of potential target date investments, but I have found only three fully indexed target-date families that are available to the public. (Others, such as those offered by State Street Global Advisors, can be accessed only through employer retirement plans, and their assets are growing fast.)

The iShares ETF behemoth uses the S&P Target Date Index family, which not so coincidentally uses iShares ETFs to represent the asset classes. S&P Dow Jones Indices determines its asset mix for each target date by annually surveying all the target-date fund families and applying the “consensus” allocations to its indexes.

Deutsche Bank’s db-X Group bases its ETFs on the Zacks Lifestyle Indexes, about which there is no information to be found other than both stocks and bonds are included.

Wells Fargo Advantage Funds, which are mutual funds and not ETFs, track the Dow Jones Target Date Indices. These are indexes of indexes, comprised of six for domestic stocks, three for international stocks, four for fixed income and one for cash. The sub-indexes are equally weighted within each asset class and are rebalanced monthly.

Of the three, Wells Fargo has gathered the most assets ($14.7 billion), largely because it actively markets to 401(k) plans. iShares follows with $192.5 million and Deutsche Bank has $115.6 million.

Getting back to my assertion that ETFs may not be the best vehicle for target-date funds, I base the opinion on this observation: The investors most attracted to these funds are people who have little or no interest in the investing process and who save for retirement month by month.

ETFs are made for trading, but this kind of investor doesn’t trade much if at all. And the point of target-date funds is to pick a target year and stick with it. Moreover, buying a few shares of target-date ETFs every month would cost a fortune in commissions over 20 or 30 years, even at discount brokers.

On the other hand, the low-cost benefit of indexed investing is more readily available in the ETF world, where management fees are under competitive pressure. The expense ratios of the iShares target-date ETFs are in the basis-point range of high 20s to low 30s. Deutsche Bank charges 0.65%, or 65 basis points, while Wells Fargo collects from 86 to 93 basis points.

Commission costs trump management fees, particularly for those who put aside money regularly for many years. The more important consideration, however, is that target-date funds help certain kinds of people overcome bewilderment and anxiety to invest for retirement. That’s a valuable service, indeed.

John Prestbo is retired as editor and executive director of Dow Jones Indexes, now part of S&P Dow Jones Indices, in which Dow Jones & Co. publisher of MarketWatch, holds a small interest. Prestbo also is an adviser to MarketGrader Capital, which scores stocks on the basis of fundamental factors and chooses components of the Barron’s 400 Index.