If you read Joel Greenblatt's The Little Book That Beats the Market, he says:
Owning two stocks eliminates 46% of the non market risk of owning just one stock.
This risk is reduced by 72% with 4 stocks, by 81% with 8 stocks, by 93% with 16 stocks, by 96% with 32 stocks, and by 99% with 500 stocks.
After purchasing 6-8 stocks, benefits of adding stocks to decrease risk are small.
Overall market risk won't be eliminated merely by adding more stocks.
And that's just specific stocks. So you're very right that allocating a 1% share to a specific type of fund is not going to offset your other funds by much.
You are correct that you can emulate the lifecycle fund by simply buying all the underlying funds, but there are two caveats:
Generally, these funds are supposed to be cheaper than buying the separate funds individually. Check over your math and make sure everything is in order. Call the fund manager and tell him about your findings and see what they have to say.
If you are going to emulate the lifecycle fund, be sure to stay on top of rebalancing. One advantage of buying the actual fund is that the portfolio distributions are managed for you, so if you're going to buy separate ETFs, make sure you're rebalancing.
As for whether you need all those funds, my answer is a definite no. Consider Mark Cuban's blog post Wall Street's new lie to Main Street - Asset Allocation. Although there are some highly questionable points in the article, one portion is indisputably clear:
Let me translate this all for you. “I want you to invest 5pct in cash and the rest in 10 different funds about which you know absolutely nothing. I want you to make this investment knowing that even if there were 128 hours in a day and you had a year long vacation, you could not possibly begin to understand all of these products. In fact, I don’t understand them either, but because I know it sounds good and everyone is making the same kind of recommendations, we all can pretend we are smart and going to make a lot of money. Until we don’t"
Standard theory says that you want to invest in low-cost funds (like those provided by Vanguard), and you want to have enough variety to protect against risk. Although I can't give a specific allocation recommendation because I don't know your personal circumstances, you should ideally have some in US Equities, US Fixed Income, International Equities, Commodities, of varying sizes to have adequate diversification "as defined by theory." You can either do your own research to establish a distribution, or speak to an investment advisor to get help on what your target allocation should be.