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Best Target-Date Funds for your 401(k)

If you're at a loss for what to invest in, a target-date fund is a great place to start, says Nellie Huang, editor, Kiplinger’s Personal Finance.

A target-date fund allows you to put your retirement saving and investing on autopilot. Simply choose a fund with a target year that's closest to the time you plan to retire, and sock away your 401(k) savings in it. The experts who run the fund will manage your investments, gradually shifting your money into a mix of assets that are appropriate for your time horizon.

Here are our favorites among the largest funds in workplace retirement plans:

American Funds – Only one target-date fund from American Funds, 2030 Target Date Retirement, has enough 401(k) assets to make our list. But the series overall is solid. Its glide path – the prescribed blend of stocks, bonds and cash as the fund moves closer to its end point – starts conservatively, with 85% in stocks for investors with 40 years left in the workforce. "We intentionally have a relatively conservative position at the beginning so that in a downturn, there's less volatility for younger investors," says Toni Brown, who leads the retirement strategy group at American Funds. The 2030 fund holds 65% in stocks, 28% bonds and 7% cash. The series continues to shift allocations for another 30 years after the target year, when it ends with roughly 30% in stocks and the rest in bonds and cash.

Fidelity Funds – Five years after Fidelity revamped its Fidelity Freedom target-date fund series, the funds are starting to turn in improved long-term results. The Freedom glide path is decidedly moderate in risk. For investors 20 or more years from retirement, it starts with 86% in stocks, 6% in bonds and 8% in cash. After retirement, Freedom funds continue to shift. At last report, the 2005 Freedom fund held 23% in stocks, 55% in bonds and 22% in cash.

T. Rowe Price – The T. Rowe Price Retirement series of target-date funds has performed spectacularly, thanks to an above-average slug of assets invested in stocks throughout the glide path. For example, the 2035 fund, geared for workers who are roughly 50 years old today, holds 79% of assets in stocks; its typical peer holds 74%. The Retirement target-date series operates on a 70-year plan: You save for 40 years, and then you spend for 30 years. That means the Retirement target-date series shifts its blend of stocks and bonds for three decades past its target year.

Vanguard – There's a lot to like about Vanguard Target Retirement funds. They are simple: Each target-date fund holds just four to five index funds. They are cheap: The Investor share class of Vanguard's retirement-geared funds have expense ratios that range between 0.12% and 0.15%. They are moderately positioned: Target Retirement 2035, the fund for investors who expect to retire in 15 years or so, holds 75% in stocks and 24% in bonds. And each fund boasts a solid long-term track record.

Editor’s Note: Nellie S. Huang is a senior associate editor at Kiplinger's Personal Finance magazine,

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