After losing one-quarter of their value, on average, during 2008, and sending ripples of outrage and cries for regulation through Washington, target-date funds bounced back in 2009, making up much of their steep losses.

Is regulation still the answer?

"Do the returns of the funds in the short term take the pressure off the cries for regulation? Absolutely. But the underlying problems are just exacerbated, as more and more money comes into these funds," said Mike Alfred, the CEO of BrightScope, an independent provider of 401(k) ratings and financial intelligence to plan sponsors, advisers and participants.

Conservative by nature, target-date funds nevertheless got slammed during the recession, losing an average of 23% in 2008. The 2010 funds, intended for those planning to retire this year, became the subject of particular scrutiny and anger. Sen. Herb Kohl, D-Wis., the chairman of the Special Committee on Aging, said last month that he would introduce legislation to require that target-date fund managers take on fiduciary responsibilities. He also questioned junk bond investments as part such funds' underlying portfolios.

A Morningstar report written by senior fund analyst Josh Charlson revealed, however, that the average 2010 fund clawed most of the way back in 2009, with a 20% return. Even more important, Charlson wrote, the average 2010 fund was down only about 4.5% from Oct. 1, 2007, through Nov. 30, 2009.

"I don't think that regulation per se is going to be the answer," he said in a telephone interview on Monday. "I think more transparency and disclosure would be a positive. And I think it will be better if regulators nudge the companies in the right direction. But I hope we don't see regulations on what kind of asset allocation these target funds have to carry."

Alfred conceded that returns have come back significantly but added, "The conflicts of interest seem to be as rampant today as they were one year ago."

For him, "it's the market, not the target-date funds themselves, that [is] improving. The decline in the stock market revealed a lot of the problems with target-date funds, but the recovery in the stock market doesn't necessarily fix all of those problems."

The biggest conflict of interest Alfred sees is how investment managers select the glide path, or the proportion of equities that the target-date fund owns over time. A 2050 target-date fund would have more equities in it than a 2010 target-date fund would because the funds closer to maturity are supposed to get more conservative.

Equity's share in 2010 funds ranged from 30% to 70% of the major fund families, signaling that glide paths were chosen arbitrarily by the fund managers. "The equity percentage is based on the potential profits of the investment manager more than [on] what is best for the investor," said Alfred. Another problem, he said, is that some investment companies place new funds that have no return histories within a 401(k) plan's default option, into which employees are automatically enrolled.

With assets in target-date funds projected to grow to $2.6 trillion by 2018 and to attract 80% of new and reallocated flows into defined contribution plans for the next decade, according to a recent Casey, Quirk & Associates LLC study, creating plans that profit both investors and investment managers is a challenge.

"Right now there's a mismatch between what people expect from these funds and what has actually happened," said Alfred.

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