Add target-date funds to the list of headaches for advisers and investors.

Created as the ultimate one-stop shop for retirement savings, they are now on the list of products that are more complex than anyone realized.

Indeed, there is a move for more transparency in target-date funds although some market observers are not convinced they will solve the current problems.

The guidance that the Department of Labor and the Securities and Exchange Commission issued last Thursday (see “DOL, SEC Publish Target-Date Bulletin,” MME 5/10/10), is aimed at helping investors better understand and evaluate these funds. And the DOL also plans to propose new rules that will ensure more information for investors who choose these finds through their retirement plans via the default option.

Laura Lutton, an editorial director of Morningstar’s fund research group, said that she would have rather seen rules aimed at the fund companies instead of simply telling investors to prepare themselves.

To be sure, this may not stir popular outrage like we’ve seen in recent years, but the conversations over target-date funds will be more important. For one thing, for millions of American, their target-date fund truly is their nest egg. Moreover, these were supposed to be so easy. They were created as a set-it-and-forget-it strategy to retirement savings.

Some clients’ eyes may glaze over when you talk about accumulation versus distribution, or the glidepath of a target-date fund. But they will definitely want to know why there is suddenly a controversy over the definition of target. Or date.

The problems surfaced in 2008, when people who owned 2010 funds lost 23% of their assets. That kind of loss will always create some agita, Lutton said. But when you’re two years away from retirement, and you’ve bought a special fund that was supposed to get more conservative as you got older, it can be especially unnerving.

“I think a lot of investors were surprised to see half their assets in equities in 2008 when they were set to retire in 2010,” she said.

The problems largely boil down to the fact that many of the funds that are marketed as a certain year, say 2010, do not really reach their most conservative assets mix in that year. Quite the contrary, they may not reach the most conservative asset mix for another 20 years.

And the argument from the funds is this: The retirement date was designed as the date that investors stop making contributions, not necessarily the date they make a 180-degree turn from accumulation to distribution. They are going to live another 20 to 30 years, and they still need to generate income.

These products need to be marketed as instruments designed to carry an investor two or three decades into retirement, said Joe Nagengast, founder of Target Date Analytics. He testified in front of Congress last year on this issue and said the new moves for more transparency do not address the problem that is really very simple.

“You need to regulate the name of the fund,” he said.

A fund that is called a 2010 fund should reach its most conservative asset mix in 2010. That doesn’t mean necessarily that it has to be all in fixed-income; rather, it just should reach on that date whatever it originally said its most conservative allocation would ever be.

To take an extremely hypothetical example, Nagengast is fine with a fund that will be 80% in equities on the day someone retires, as long as it’s marketed as such.

He dismissed the argument of longevity risk because he said that’s not technically an investment risk. “We’re all preparing for longevity risk, that’s what this whole thing is about,” he said.

Despite some of the ambiguities about target-date funds’ actual target destination, their risk levels and glidepaths, Lutton said this isn’t decreasing their popularity. Since they are now available in many 401k plans as the default option, they continue to take in cash.

So while this issue works its way through the official gristmill, advisers need to be working with you clients.

First and foremost, advisers need to make sure they understand the way the target-date funds work and what exactly happens on the date the client retires. Make sure the client understands it, too, and has an investment plan for that key retirement date.

Do they want to keep their money in that fund, or do they plan to take all of it out and put it into something else? That distinction of accumulation and distribution is really the key to their understanding of this whole issue.

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