By Humberto Cruz

The folks who regulate mutual funds want our comments on "target-date" funds. Mine is to disclose risks -- and potential losses -- more clearly.

Target-date funds, popular offerings in retirement plans, are designed for people retiring in or near a certain year. For example, a 2030 target-date fund would be for those looking to retire then.

Rather than have to put together and readjust a diversified portfolio over time, investors leave the task up to the fund manager. Target-date funds typically invest in a diversified mix of stocks, bonds and cash that becomes more conservative as the target date nears.

Target-date funds, which hold about $270 billion in assets, got a boost in December 2007 when the Department of Labor made them a default option in 401(k) plans. Under department rules, plan participants who don't choose other investments have their contributions automatically directed to diversified portfolios of stocks and bonds.

The concept is good, but the timing was horrible. With stocks and corporate bonds suffering one of their worst years, even fairly conservative funds with a target date of 2010 lost nearly 24 percent of their value on average in 2008.

These losses shell-shocked many workers/investors who thought target-date funds were "safe." Adding to their confusion was the fact that funds from different companies with the same target year typically hold a different mix of stocks, bonds and cash, or follow different investment strategies. Unless you peruse the fund prospectus -- as every investor should -- you don't know what you're getting with a target-date fund.

All this has led the Securities and Exchange Commission to propose new rules for the marketing of target-date funds. The SEC is seeking comments on the proposal until Aug. 23 (you can post yours at www.sec.gov/rules/proposed.shtml).

Under the rules, marketing materials for a target-date fund that includes the target date in its name would have to disclose its asset allocation -- for example, so much in equity securities and so much in fixed income securities or cash -- the first time the fund's name is used.

In addition, marketing materials would have to prominently include a table, chart, or graph clearly depicting the asset allocation over the life of the fund, immediately preceded by a statement explaining that the asset allocation changes over time and stating when the allocation becomes final and what it would be then. Marketing materials must also warn investors that it is possible to lose money in the fund, including after the target date.

All well and good, but I'd like to see more specific disclosures about risks and potential losses. So would Daniel Wiener, an investment adviser who publishes an independent newsletter on Vanguard funds.

"Just knowing a fund has 60 percent or 80 percent in stocks won't mean much to the millions of investors in 401(k) plans who are told to 'set it and forget it,'" Wiener said. "Hard numbers are needed."

Wiener's idea, a good one, is to require fund literature to disclose prominently the maximum cumulative loss ever for every broad asset class and allocation (and for a fund that has existed for at least five years, the fund itself). For example, a fund such as Vanguard Target Retirement 2050 Fund would have to disclose that even a diversified portfolio of U.S. stocks has lost as much as 51 percent; of foreign stocks, as much as 58.5 percent, and of bonds, 5.8 percent, and that the fund itself lost 47.9 percent between November 2007 and February 2009.

Before buying, you should know that.

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© Humberto Cruz

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