Just where is the bull's-eye?
An investor who will hit age 65 in 2010, for example, might pick a 2010 target-date mutual fund, which is designed to offer an appropriate mix of stocks and bonds.
Many investors, though, were caught off guard when people nearing retirement lost a ton of money in these target-date mutual funds during the market meltdown in 2008.
One 2010 target-date fund lost 41 percent in 2008. Those who invested in Oppenheimer Transition 2010 lost more money than if they had invested all their money in stocks. The Standard & Poor's 500 index fund lost 37 percent in 2008.
"Imagine it's 2009 and you lost 41 percent and you're retiring next year," said Marilyn Capelli Dimitroff, a certified financial planner from Bloomfield Hills, Mich.
A target-date fund is a prepackaged portfolio of mutual funds that invests in stocks, bonds and cash equivalents. The target-date fund makes all the decisions for the investor -- both initially and going into the future -- to offer a diversified mix of funds to address investment goals for a date in the future, such as retirement. The asset mix is designed to gradually and automatically become more conservative -- shifting away from stocks -- as the investor approaches and enters retirement. The target-date funds do take on the risks associated with the underlying mutual funds that are part of that target-date fund.
Target-date funds as they work now are "fundamentally misleading to investors," according to testimony that Dimitroff gave in Washington, D.C., in June. She spoke before a joint hearing of the Securities and Exchange Commission and the U.S. Department of Labor.
Dimitroff, now the chair of the board of directors for the Certified Financial Planner Board of Standards Inc., maintains that industry standards should be established for appropriate asset allocations for target-date funds.
Such standards are needed, she said, to "ensure that target-date funds are not misleading to consumers on either extreme -- too much cash for the young investor or too much equity for the investor near retirement."
No regulatory changes have been made yet.
The lesson for investors: Know what you own.
Dimitroff said she even has had some clients who did not know their money in their 401(k) plan ended up in a target-date fund.
A target-date fund can be used automatically in a 401(k) plan when employees do not pick their own investments. All target-date funds aren't the same, either, even if the date is the same.
Take 2010 target-date funds. The range of losses was from 9 percent to 41 percent for the 2010 target-date funds in 2008, according to Morningstar. On average, a group of 2010 funds lost almost 25 percent in 2008.