You touched on a critical point, Jim: The irony of target-date funds is that, while they are supposed to be the ultimate in passive investing—"set it and forget it"—they really require some of the closest scrutiny of any funds on the market.

The asset allocation decision is both the most important and the most controversial decision in investing, and each target-date fund makes it differently.

I doubt I'll ever get to retire, but if I do, it will be around 2035 or 2040. I thought I'd take a look at a handful of target-date funds "targeting" that retirement date and see what kind of allocations I would get.

TDAX Independence Shares 2040 (TDV): 97% stocks, 3% bonds, ER of 0.67%

The new TDAX Independence Shares 2040 fund gives me an aggressive, domestic-heavy allocation, with 97% in stocks and 3% in bonds. That heavy equity exposure includes a 56% allocation to domestic large-caps, 19% to domestic small/mid-caps and 24% to developed international equities. 

All in all, it's a decent allocation. If I had to pick out some flaws, I would say that the domestic/international split seems off. First, the real-world capitalization split is more like 50-50, so this is an aggressive tilt toward the domestic market. Second, my job (like most people's jobs) is closely correlated with the health of the U.S. economy, and therefore, U.S. equities. As such, I'd rather have more exposure overseas. The lack of any exposure to emerging markets is also worth noting.

But as I'll show, the TDAX fund actually has a heftier international allocation than most target date funds—that 24% is actually a good number, even if it's a little low for my tastes. All in all, it offers a reasonable allocation with a low expense ratio, unlike, say, the ...

Seligman TargetFund 2035 (STZAX): 100% stocks, ER of 1.27%

There are a number of things that bother me about this fund of funds. For starters, it charges a hefty 1.27% in annual expenses, plus a nasty 4.75% load for the A shares. For this, you get exposure to six ETFs—MDY, IWM, SPY, EFA, DLS and EEM—with a combined expense ratio of 0.29%. In other words, you're paying an extra 0.98% in annual expenses plus a 4.75% load for the convenience of buying six ETFs. Foliofn, anyone?

Moreover, while the top-line allocation (70% domestic equities, 30% foreign equities) looks similar to the well-structured TDAX product, when you drill down, the allocation is actually quite different. This fund places a huge emphasis on small-cap exposure: 50% of the fund is allocated to domestic small- and mid-caps (25% small, 25% mid), compared with just 20% in large-caps. I appreciate a small-cap emphasis, but that's a fairly extreme allocation.

The fund does at least add in emerging markets exposure, splitting its international exposure three ways: 10% developed large-cap, 10% developed small-cap, 10% emerging markets.

That strikes me as a nice balance, and would give the fund a nice diversification benefit. Still, the fees are high and the domestic allocation has a strong-enough slant that it would leave me worried.

Vanguard Target Retirement 2035 Fund (VTTHX): 90% stocks, 10% bonds, ER of 0.21%

The Vanguard Target Date funds are some of the best, holding simple, largely cap-weighted allocations diversified broadly across the markets. The 2035 fund currently has a 70% position in the Vanguard Total Stock Market Fund (domestic stocks), 10.5% in Vanguard Europe, 4.7% in Vanguard Pacific and 2.9% in Vanguard Emerging Markets; the 10% bond position is in the Vanguard Total Bond Market Fund.

Fidelity Freedom 2035 (FFTHX): 85% stocks, 15% bonds, ER of 0.81%

Fidelity's fund of fund offering holds a slightly less aggressive stock/bond split than competing funds, although that is mitigated by the fact that half of the bonds exposure is in high yield.

The fund breaks down its equities exposure with a 66% domestic allocation and a 17% international exposure. The domestic exposure is concentrated in large caps, with a 47%/15%/3% split among large/mid/small caps.

The international exposure is predominantly developed markets.

The 0.81% expense ratio is getting toward too high, but is still in the ballpark.

T. Rowe Price Retirement 2035 (TRRJX): 90% stocks, 10% bonds, ER of 0.76%

The T. Rowe Price fund of funds holds 61% in large cap domestic equity funds, 9.7% in mid-caps and 5.5% in small-caps, a fine split across the capitalization spectrum. However, the fund has just a 13.9% allocation to international stocks—one of the lowest on the market. This breakdown would make me worry about putting too many eggs in the domestic basket.

The bonds exposure includes a 3+% position in high-yield bonds.

     * Indicates exact breakdown could not be determined. Data is from the various providers' Web sites.

Looking at that chart, the most important column is the one on the right—expense ratio—where the price can range by more than 1 percent per year. Multiply that out by 30 years, and you're talking serious money.

But other columns are important too—look at the difference in the small-cap and international exposures, or even the dearth of emerging markets exposure across all the funds.

Funds like the new TDAX funds are a big step in the right direction, but as Jim says, we need better benchmarks and a better understanding of how asset allocation decisions are made. From my pure indexing perspective, all these funds are still light on international exposure, and the strong small-cap tilt in many portfolios is worrisome. Others may not share my concerns. The point is that you have to look underneath the surface of these funds to make sure that the allocations make sense for you.