Senate Weighing New Rules for Retirement Funds

Target funds are on the agenda of a hearing the committee on aging will hold Wednesday looking into the impact of the financial crisis on the ability of baby boomers to retire. Falling home prices have wiped out many investors' nest eggs. According to the S&P/Case-Shiller Home Price Index, home values in 20 of the country's largest markets fell 18 percent in November from a year ago, the latest data available. The stock market has fared even worse, with the Dow Jones industrial average dropping about 41 percent over the past year.

Glen Buco, president of West Financial Services in McLean, said he sometimes recommends that clients choose target funds that mature at a different date than they actually plan to retire, allowing them some control over how aggressive their fund is. If they want to take on more risk, they should choose a fund that targets a date after their retirement. If they are conservative, they should opt for one that matures before that date.

In some cases, investors want a higher risk level in a target fund. Some funds may still be invested heavily in the markets -- despite nearing maturity -- to help ensure a large enough return for the money to last through retirement years. Rod Bare, director of asset allocation strategy at Morningstar, said that investors also have varying appetites for risk. Some may be using their target funds as bequests and want a more aggressive investment plan. Others may be relying on the fund as their retirement income and would rather play it safe. Morningstar recently established new target fund indexes, each in three risk profiles, to help investors better gauge the performance and composition of their funds.

"There is a certain amount of investor diversity out there that is healthy and normal and appropriate," Bare said.

Still, there is widespread agreement that investors should adjust their assets to a more conservative mix as they near retirement. Though target funds can help with that effort, experts say that investors cannot escape keeping an eye on their funds.

"Just because it's a prudent selection on the day you pick it doesn't mean you don't have to monitor it," said Jack Vanderhei, research director at the Employment Benefits Research Council.

Investors can get a sense of the future composition of their funds by looking at those close to maturity, Buco said. But he cautioned that allocation strategies could change and that letting someone else manage your retirement entirely is never a good idea.

"If they were all the same, fine," he said. "But they're not, and that's the issue."