Target-date funds have been under fire ever since they took a drubbing in last year's market plunge.
Workers near retirement were devastated to find that their funds had far more exposure to the stock market than they thought and suffered steep losses.
There have been calls in Congress for greater oversight of the funds and even a suggestion that the government limit how much stock they can hold for workers about to retire. Investment companies, including Baltimore's T. Rowe Price Associates, have re-examined their target-date funds to see if they are too aggressive. And this month, the Securities and Exchange Commission and the Department of Labor will hold a joint public hearing on the funds.
Despite the uproar, target-date funds remain a good option for many workers. (Full disclosure: I invest in Vanguard Group's target-date fund in my 401(k) plan.) What recent events have taught us, though, is that all target-date funds aren't alike, even if they have similar names. The funds need better disclosures and workers need more information on how the investments work and their risks. And investors must remember that while these funds make most of the decisions for us, we can never be too complacent or too hands-off.
"That's probably the lesson for the participant," says Rick Meigs, president of 401(k)helpcenter.com. "It's still their money, and they can't ignore the responsibility of monitoring the target-date fund."
Target-date funds emerged in the 1990s and in recent years became a staple in 401(k)s because they addressed a serious problem: worker inertia. Too often employees selected a 401(k) investment, like an ultra-conservative interest-bearing account, and then ignored it for years.
With a target-date fund, all you do is choose a single fund with the date closest to your expected year of retirement and let professionals do the rest. They choose the mix of stocks, bonds and cash and automatically adjust the portfolio to be more conservative as retirement nears. The government liked the concept so much it approved target-date funds as a suitable investment when employers automatically enrolled workers in a 401(k).
Three years ago, about 3 percent of 401(k) assets were in target funds, according to the Senate Special Committee on Aging. That figure is expected to reach 20 percent next year and more than one-third by 2015.
Critics early on complained that target-date funds were too conservative. Some funds beefed up stock holdings in response.
