Are two 2010 target-date funds likely to carry the same stock exposure? Even sophisticated clients are likely to get this question wrong. That's why the U.S. Labor Department and the Securities and Exchange Commission are now preparing target-date fund guidance.

Target-date funds, also known as lifecycle funds, are designed to move money from riskier investments such as stocks to more conservative alternatives like bonds as an investor approaches retirement.

In 2008, 7.3 million Americans held target-date funds, according to the Employee Benefit Research Institute's database of 24 million 401(k) participants. Clearly, many investors think target-date funds from different investment companies, carrying the same target date, will have the same stock and bond exposure. That is by no means the case, however.

"Not all target-date funds are created the same, and some with very near-term target dates lost substantial amounts of investors' money in 2008," SEC Chairman Mary Shapiro explained in a February 5 address to members of the Practicing Law Institute.

"In the year ahead, " she said, "we are going to confront the issue of the potential for target date fund names to confuse investors, or lull them into a false sense of security. I have asked the staff to prepare a rule proposal to provide additional information to investors when a fund includes a date in its name."

The target-date controversy began in earnest in February 2009, when an investigation by the U.S. Senate Special Committee on Aging found that, among funds designed for people planning to retire in 2010, there was "a wide variety of objectives, portfolio composition and risk." The committee recently found that the equity allocations of various 2010 target date funds ranged from 24% to 68%.

Critics observe that while target-date funds do offer the advantage of regular rebalancing by investment managers, they are often far riskier than investors think.

"The fact is that some advertisements perpetuate a 'set it and forget it' mentality-which is concerning," Shapiro explained. "Given the growing prevalence of these funds as a retirement tools, [the SEC's initiative] will have a real impact on everyday Americans.

Target-date fund investors were clearly ill-prepared for the deep losses they experienced in 2008 and 2009. Target date funds with the "vintage year" 2010 lost 25.06% in 2008, according to Morningstar-better than the S&P 500's 37% loss for the year but still a major blow.

The S&P 500 index bounced back with a 26.46% return in 2009, while the average 2010 target-date fund returned 22%, according to Morningstar. The top performer, John Hancock Lifecycle 2010, rose 31% for the 12-month period, observed Josh Charlson, a senior mutual fund analyst at Morningstar.