Regulators take a hard look at rules for target-date funds

— -- In the wake of steep losses in 2008, regulators are taking a hard look at whether they need to tighten rules governing target-date funds, an increasingly popular investment option in 401(k) plans.

The Securities and Exchange Commission and the Department of Labor have scheduled a hearing Thursday that will examine whether investors in these funds — particularly older workers who are approaching retirement — fully understand the risks.

Target-date funds invest in a portfolio of stocks, bonds and money market funds, based on the year the investor plans to retire. As the investor nears retirement, the portfolio becomes more conservative.

But as the dust cleared at the end of 2008, many 401(k) workers who were close to retirement discovered that their target-date funds were still heavily invested in stocks, says Carl Hess, global head of investment consulting at Watson Wyatt. From October 2007 through February 2009, the median decline for funds with a target date of 2010 was 32%, according to an analysis by Watson Wyatt.

The amount of risk among different target-date funds varies significantly, the analysis found. Funds designed for workers who are within 10 years of retirement had anywhere from 32% to 80% of their assets in stocks.

Sen. Herb Kohl, D-Wis., head of the Senate Special Committee on Aging, has led the charge for more regulation of target funds, arguing that inadequate oversight could jeopardize Americans' retirement security.

Fund companies that offer target-date funds say they help investors avoid common mistakes, such as investing too conservatively when they're many years from retirement. In addition, target-date funds "can be a great option for people that don't want to go to a lot of trouble every year to rethink their asset allocations," says Byron Beebe, U.S. retirement market leader for Hewitt Associates.

Still, Beebe says, workers need better information about the mix of investments in their target-date funds. One of the issues expected to be discussed at Thursday's hearing is whether regulators should require fund companies to improve disclosure so investors can decide whether a fund is appropriate for them.