New AARP Fund

May 25, 2006

It's a match made in mutual fund marketing heaven.

AARP, the organization dedicated to the interests of persons who aren't quite as young as they used to be, launched its first three mutual funds and the end of 2005. And you don't have to be over 50 – the minimum age to join AARP – to invest in them.

AARP's Conservative, Moderate, and Aggressive Funds are geared toward investors with risk tolerances ranging from, well, conservative to aggressive. Each fund invests in a different mix of three underlying index funds managed by State Street Global Advisors. Those indexes track U.S. stocks through the MSCI U.S. Investable Market 2500 Index, international stocks through the MSCI EAFE Index, and U.S. Bonds through the Lehman Brothers Aggregate Bond index.

According to AARP, the aim of the new no-load funds is to make the investment process easier in hopes of encouraging people to increase the amounts they invest.

"It is no secret that individuals are not saving enough for retirement," said AARP Financial President Larry Renfro in a prepared statement. "We believe investors are overwhelmed by the numerous choices available to them in the marketplace and the difficulty of assembling and managing a retirement portfolio on their own."

Like Vanguards successful LifeStrategy funds, the new AARP funds are meant to be a 'set it and forget it' investing solution – at least until your risk tolerance changes. (A complete no-work solution would age with you, and gradually get more conservative as the Vanguard Target Retirement, Fidelity Freedom, or T. Rowe Price Retirement funds do.) All an investor needs to do is determine their risk tolerance, pick a fund, and write a check. AARP's funds do the diversifying and rebalancing for you.

The new funds come with a 0.50% expense ratio through November 1st 2007 – inexpensive, but more costly than Vanguard's LifeStrategy offering that charges just 0.25%. Vanguard LifeStrategy fund's cheaper cost makes them hard to beat in a head-to-head comparison, but AARP does have a minimum investment requirement of just $100 versus upwards of $3,000 for the LifeStrategy funds.

In addition, the new AARP funds have a 2% redemption fee if sold within 60 days of purchase – the Vanguard LifeStrategy funds do not.

For inexperienced investors who don't have enough to meet Vanguard's minimums, the new AARP funds are a no-worries option, and are certainly a better place for your money than under the mattress or in your saving account. That said, we aren't big on these turnkey solutions for more experienced investors.

Fund of funds can be expensive. The worst thing about mutual funds is that expenses are taken out of your investment returns. A fund of funds adds an additional layer of expenses on top of those associated with the individual funds in its portfolio. While AARP's funds of funds are cheaper than many non-fund of funds out there, others (usually the kind that buy funds from several fund families) have significant double-layer fees – the fund of funds itself, and the expenses of the underlying funds. Single-family fund of funds tend to be cheaper because they are happy making money on the underlying funds and are merely using the fund of funds as a conduit to their other funds. In this case, AARP Financial (the fund advisor) pays State Street to manage the money in index portfolios, not unlike many Vanguard funds, which pay sub-advisors to actually choose stocks and bonds.

Furthermore, the diversification of these funds is obviously not geared toward each investor’s individual situation. Broad conservative, moderate, and aggressive allocations will work for most investors, but some people will require a bit more fine-tuning than these funds provide.

AARP's good name and marketing muscle could make these funds a success, but investors of all ages can probably do better elsewhere.

More information can be found at