Target Retirement Funds: A good blend of Active and Passive Investment

In this post I decided to highlight Target Retirement Funds which have become immensely popular over the last few years - thanks to T.Rowe Price, Vanguard and Fidelity.

Whats the idea behind Target Retirement Funds?
To let you pick the year of retirement and invest in a fund that has a name closest to that year, and forget about the hassles of investing in a variety of funds. A target retirement fund automatically adjusts the asset allocation for you as your retirement approaches. For example, say you are planning to retire in 2043, and you invest in T.Rowe Price Target Retirement 2045 fund, it will decrease the percentage of stock allocation and increase the percentage of bond allocation as retirement (2045) draws nearer. These funds invest in a variety of underlying funds and adjust the allocation mix to make it more conservative over time.

Who should invest in Target Retirement Funds?
As to most questions, the answer to this is - it depends. These are some situations that come to my mind for investing in Target Retirement Funds:
-Someone who wants the benefit of active and passive funds together. Active mutual funds are usually managed by a fund manager and impose higher fees on investors. Passive mutual funds include investment vehicles like index funds and ETFs, are managed by computer robots and the fees imposed on investors are much lower. A target retirement fund typically diversifies its assets among multiple funds (active and passive). Although it is managed by a human fund manager, it does not involve a lot of intervention from the fund manager, and hence results in lower fees.
-Someone who is starting out, and wants a ready-made diversified portfolio, till he can judge how he wants to actively spread his portfolio. An example would be a fresh graduate from college, who wants to start testing out the waters with a low risk exposure.
-Someone who wants target retirement funds as part of a broader portfolio (retirement or non-retirement).

Where can you buy Target Retirement Funds?
The 3 most prominent companies that provide target retirement funds are T.Rowe Price, Vanguard and Fidelity
T.Rowe Price: T.Rowe Price offers the most aggressive of all target retirement funds with a good underlying asset allocation between large cap, mid cap and international. It offers a broad range of target retirement funds ranging from Target Retirement 2005, 2010 to Target Retirement 2055. These are all no-load funds with an expense ratio of about 0.75%.
Vanguard: Vanguard remains the leader in low-cost funds with the expense-ratio of target retirement funds being around 0.21%. Underlying asset allocation is mostly devoted to index funds - mainly total stock market, total bond market index funds. Offers a broad range of retirement funds from Target Retirement 2005, 2010 to Target Retirement 2050.
Fidelity: Fidelity has its range of Freedom Funds ranging from Freedom 2000 to Freedom 2050. Fees range from 0.57 to 0.84%. Underlying asset allocation is distributed between all kinds of Fidelity Funds, with no underlying fund making up more than 10-12% of holdings.

Comparing asset allocation for 2040 funds:
T.Rowe Price: Cash 4.25%, Stocks 87.08%, Bonds 7.23%
Vanguard: Cash 1.16%, Stocks 88.48%, Bonds 9.93%
Fidelity: Cash 3.66, Stocks 83.43%, Bonds 11.53%

Performance:
Over the last 2 years (Source: yahoo finance):

As you can see, the performance of Vanguard 2040 and T.Rowe Price 2040 have pretty much mirrored each other over the last 2 years.
It looks like either T.Rowe Price or Vanguard might be a good place to start your target retirement, if I was looking for a more aggressive portfolio, I d go with TRP, if I was looking for lower fees, I would go for Vanguard.

Voluntary disclosure: I currently own T.Rowe Price Target Retirement 2040.