By Rob Silverblatt

Ever since target-date funds took on sharp losses during the downturn, critics have been wondering aloud whether these products, which are marketed to hands-off investors, have taken on too much risk. Target-date funds start out with hefty exposure to stocks and become more conservative with time. But as investors learned the hard way, just how tame the portfolios become--and how long it takes funds to reach their highest exposure to bonds--can vary quite a bit from fund to fund.

The appeal of target-date funds has been that they offer a "set it and forget it" promise to investors. In other words, investors just need to decide approximately when they'll retire and pick a fund associated with that date. A fund with 2020 in its name, for instance, is meant for investors who plan on retiring 10 years from now. After picking the fund, the investor can leave the often-stressful process of asset allocation up to the provider.

Investors who put their portfolios on autopilot, however, got a rude awakening during the downturn. In 2008, the average target-date 2010 fund, which in theory should have been quite conservative, lost 24 percent, according to the Securities and Exchange Commission. This prompted investors to take a harder look at the funds, and what they have found is that a number of them can be quite risky.

So what exactly does a risky target-date fund look like? In a recent report, Standard and Poor's highlighted Oppenheimer's Transition 2020 Fund as an example of a product that's far more aggressive than its peers. As of earlier this year, the Oppenheimer fund had 87 percent of its portfolio in stocks, according to S&P. That equity allocation is a whopping 26 percent higher than the average for other target-date 2020 funds, S&P says. Through May, the fund's annualized returns over the trailing three-year period stood at negative 10.7 percent. That's substantially worse than the average fund in its category, which lost 5.4 percent on an annualized basis during that time.

"To us, more equity and less fixed income is an added element of risk. It can theoretically lead to rewards ... but right now it looks risky," Todd Rosenbluth, an equity analyst for Standard & Poor's, says of the Oppenheimer fund. "Its three-year track record through May shows this risk isn't working out."

While the Oppenheimer fund stands out now, by 2020 its portfolio will look a lot those of its peers. At that time, it will have 50 percent of its portfolio in stocks. By 2030, it will have just 20 percent in equities. The Oppenheimer fund's glide path demonstrates two important aspects of target-date funds. First, funds often won't reach their most conservative positions until years after their "target dates" have passed. And second, while all target-date funds will eventually look quite similar in terms of allocations, their paths toward their final mixes can differ radically.

With that in mind, the SEC released a proposal earlier this month that would change the disclosure rules that providers of target-date funds face. Under the new proposal, providers of these would be required to prominently display--both in print and online marketing materials--a table, chart, or graph about each fund's glide path. A glide path reflects how a fund's allocation to stocks and bonds change over time.

Rosenbluth says that it's important that investors know the relative risks of their target-date funds. For some, aggressive portfolios may even be appealing. "We're not suggesting that people sell the [Oppenheimer] fund," he says. "We're more suggesting that they be conscious of the risk that is associated with the fund."

But without doing some side-by-side comparisons, it can be hard for investors to get a sense of what is normal.

"People on their own may not know what 87 percent means," he says, referring to the Oppenheimer fund's stock allocations. "Eighty-seven for us is high because we're comparing it to funds that have 61."

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Investing - Anatomy of a Risky Target-Date Fund | Successful Investing

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