As more and more companies are bringing back matching programs, the Federal Government is taking aim at target date funds and how they work in retirement plans.  Are they good or bad? Will they be enough to build the nest egg that you need?

What are Target Date Funds?

Target date funds have been described as a mutual fund in the hybrid category that automatically resets the stock, bond and/or cash equivalents in a given portfolio to be more conservative as the holder gets closer to retirement.  It’s sort of an ‘auto-pilot’ program. In the target date fund, managers can move funds around to optimize fund performance and lower the risk of loss. The idea is for investors to start off aggressive and become more conservative as retirement approaches.

What’s the Controversy?

Target date funds became increasingly popular in 2007 when government regulations allowed it to be a default investment choice for 401(k) or employer-sponsored retirement plans that automatically enrolled newly hired workers.

But in 2008, investors nearing retirement lost an average 25 percent of their saving in target date funds according to the Securities and Exchange Commission.  These numbers troubled Congress, the SEC and the Department of Labor, sparking questions about the funds reliability.

The recent market crisis and higher risk of the target date funds have caused some investors to question the “one size fits all” approach. Many critics say the “set it and forget it” attitude is catching some investors off guard.  Others say target date funds should be managed to the retirement year, not the investor's potential lifespan citing most people pull money out of 401(k) plans upon retirement.

Now the Department of Labor is looking to lower the risk in target date funds.  The Labor Department is making plans to issue target date fund guidance for retirement plan fiduciaries and may consider regulations on what kinds of disclosures target date fund managers must provide plan participants.

What Should You Do in the Meantime?

Employers are beginning to bring back company matching programs and the financial world may soon turn a corner. So, investors should still consider a target date fund if one is offered through a 401(k) savings plan. While target date funds are under some scrutiny, many companies, along with the government are working to make them less risky.  As an investor, be sure to compare your target date fund option to all your other investment options and ask questions. One size doesn’t fit all. Find what works for you.