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Related topics: mutual funds, retirement, investments, 401k, stocks

Target-date funds sound simple and straightforward: An investor picks the fund closest to his or her desired retirement date and leaves the asset allocation and rebalancing decisions to experienced fund managers.

But because of the stinging losses these funds suffered in 2008's financial crisis -- the average target-date fund lost almost 34% -- investors and even the U.S. government have been questioning the transparency and marketing of these popular 401k products.

"It was kind of a perfect storm," says Eric Endress, an investment analyst at CBIZ Financial Solutions, a national financial services and consulting company. "All of these employers were taking (target-date funds) up, and they were really rapidly growing in the marketplace. Then 2008 happened before these products were really ironed out and marketed properly."

Scrutiny from regulators has increased as a result. A report in late January by the Government Accountability Office urged the Department of Labor to require 401k plan sponsors to assess more thoroughly the appropriateness of particular target-date funds for their employees. The GAO also suggested better education for investors on the strategy, composition and risks of these funds.

"A lot of people almost viewed (target-date funds) like they were guaranteed accounts," says Endress. "People were thinking, 'OK, if I'm in the 2010 account, I'll be guaranteed not to lose money between now and 2010,' when in fact that wasn't the case."

That gap between perception and reality, coupled with wide variations in fund composition and performance history, has muddied the target-date waters further, causing some investors to take on outsize risk for their retirement and financial goals.

"There was an assumption that an investor would have a very conservative portfolio at the target date," says Susan Viston, a portfolio specialist at ING Investment Management. "That wasn't always the case. It became clear that (different target-date funds) have very different philosophies and approaches that can lead to different allocations and wide performance dispersions."

Experts offer these suggestions on how you can avoid surprises in your target-date fund:

Know the glide path

The trademark feature of target-date funds is a built-in asset allocation model -- the so-called glide path -- designed to shift automatically from a more aggressive strategy to a more conservative tack as the investor's retirement target year approaches.

For example, while a fund with a target date that's 40 years in the future, such as T. Rowe Price Retirement 2050 (TRRMX), might have a stock allocation of almost 90%, funds with sooner target dates tend to back off from equities and allot more money to traditionally less volatile asset classes, such as bonds. The T. Rowe Price Retirement 2015 (TRRGX) fund has comparatively fewer assets in stocks -- about 65% -- and a heavier allocation to bonds, about 29%.

However, wide variations in glide paths among fund families have produced very different results, especially for investors closest to retirement. "Some of the target-date providers had allocations to equity between 50 and 65%, while others had as low as 30% or 20% (at the target date)," Viston says.

Not surprisingly, more conservative funds fared better in 2008's harsh bear market, while investors with more aggressive funds lost almost half their portfolio's value in some cases.