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Fund Spy

Morningstar's To-Do List for Target-Date Regulators

Washington hearings should focus on transparency, not asset allocation.

Target-date funds are on the agenda in Washington, D.C., this week as the Securities and Exchange Commission and Department of Labor are holding hearings to investigate the investment strategies and disclosure practices of target-date funds.

With target-date funds, investors choose a fund whose name contains the year close to their expected retirement date. The funds' asset allocations shift gradually during the investors' careers, becoming more conservative as they reach their retirement dates. Target-date funds have become increasingly popular in retirement plans, a trend that has accelerated since 2006 when target-date funds became an approved default investment.

The trigger for the June 18 hearing is the abysmal performance exhibited by some target-date funds in 2008, particularly those with target dates near retirement. The hardest-hit 2010 funds lost as much as 41%--that's particularly painful for those investors who planned to draw from their retirement nest eggs within a few years.