"I think there's a lot of dust being kicked up as part of the regulatory reform debate," he continues. "Like all things dealing with law and regulations, the devil is in the details."

Target-Date Funds In Crosshairs
The sweeping examination of all things financial will turn to target-date funds on June 18 when the Securities and Exchange Commission and Department of Labor will hold a joint one-day hearing focusing on portfolio composition, risk and disclosure issues.

Target-date funds invest in a mix of equities, fixed income and cash equivalents that automatically rebalance toward a more conservative mix the closer the fund gets to its retirement target date. Both praised for their "auto pilot" convenience and knocked for their one-size-fits-all approach, target-date fund assets ballooned from $66 billion at year-end 2005 to $152 billion as of March 2009. That's down from $178 billion in 2007, due largely to the beating they took during the market downturn. 

In a speech last month, SEC chairman Mary Schapiro expressed concern that the average loss last year among 31 funds with a 2010 retirement date was almost 25%, with losses ranging from 3.6% to 41%. That's a hefty hit for near-retirees, and it calls into question the equity allocations for these funds-particularly those with near-term retirement dates.

Putnam's 2010 target fund, for example, was recently invested 32% in equities versus 58% for the T. Rowe Price 2010 target fund. The latter company has long had a heavy equity tilt in its target date offerings.

"We've revisited all of our assumptions and re-ran our numbers from different perspectives, and it reaffirmed our belief in the equity allocations we use," says Christine Fahlund, a senior financial planner at T. Rowe Price.

Fahlund says being too conservative might be counterproductive over the long haul. "The problem with that is it really constrains your lifestyle down the road because you won't be able to increase withdrawals, there's not much inflation protection and there's no cushion for unexpected expenses," she says.

Possible solutions for target-date funds' perceived shortcomings are hard to come by. "If there was a way to protect the downside for a reasonable price everyone would already be doing it," says Mike Henkel, managing director of retirement services for asset manager Envestnet.

One idea is to provide some type of guaranteed income as part of the package. "Theoretically it makes a lot of sense," says Morningstar analyst Michael Herbst. "Operationally is where things can get sticky because these annuity or insurance-like features can be pretty costly."

A small number of companies have rolled out target-date funds with income guarantees. But the financial condition of some of the large financial companies with capacity to offer annuity-like target-date funds raises another question. "People talk about longevity risk in terms of investors outliving their savings," Herbst says. "But for some of these types of products, the longevity risk is whether these insuring entities will be around long enough to make their guarantees stick."