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Looking at target-date funds is a bit like trying to decide on a rental car.
You go to one agency, and find certain models from GM or Ford or Toyota, with certain models considered midsize. The next rental company considers those same cars as "standard," while the third place will put certain cars in both the standard and full-size group. You get a full-size car from the fourth place, and it’s the same model that the first place tagged as midsize, the second as standard and the third (and fourth) as full-size.Lots of vehicles, similar but different, available at varying terms and conditions.The target-date fund, according to Sen. Herb Kohl, D-Wis. during a congressional hearing last week, is "on track to become the No. 1 savings vehicle in America."But if you look at the companies offering target-date funds — portfolios that adjust automatically to become more conservative as the investor nears, and then enters, retirement — you quickly see that the rules are as confusing as they are at the rental-car counter. The average consumer may want a full-size retirement, but won’t know until it’s too late that his fund is likely to deliver only the economy model.What investors learned at the Wednesday hearing of the Special Senate Committee on Aging, which looked at target-date funds as part of its efforts to strengthen the nation’s retirement-savings system, is that investors won’t get any relief soon.The committee’s primary concern was the right one, the lack of transparency and consistency in how these funds are designed. Target-date funds typically have a "glide path" designed to gently bring the investor toward retirement age and beyond.But take a look at two 2010 funds with wildly different portfolios, and see if you can tell which one takes a stock position more than 2.5 times bigger than the other.Fund A "is managed to a specific retirement year and seeks to achieve the highest total return over time, consistent with its asset mix. As the retirement date gets closer, and continuing for 15 years beyond the date . . . investment professionals gradually adjust the strategy to a more conservative investment mix. . . . So as you move into retirement, your strategy becomes more focused on protecting principal and generating income.Fund B "seeks capital appreciation and current income consistent with a decreasing emphasis on capital appreciation and an increasing emphasis on current income as it approaches its target date."That’s two different ways to say "as you age, we get more conservative." But, as it turns out, Fund A, AllianceBernstein 2010 Retirement Strategy, had nearly 72 percent of its holdings in stocks last year, two years away from the "move into retirement." Fund B — Putnam RetirementReady 2010 — had about 26 percent of its assets in stocks, so its emphasis on moving to bonds was huge long before the investor ever reached retirement age.
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