By B.J. Roche

For the midlife investor who doesn't want to spend too much time managing a retirement or 401K portfolio, target funds are a great idea. At least in theory.

They're a type of mutual funds, offered by most big fund companies like Fidelity, Vanguard, and T. Rowe Price, that, with varying mixes of stocks, bonds and cash, grow more "conservative" the closer you get to your retirement date. 

So, if you're retiring, say in 2020, you buy  a 2020 fund and fund managers diversify the holdings for you. You don't have to figure out whether your asset allocation is right--the manager does the work.

These funds are likely to play a more important role in our and our children's retirement picture, as they become the default option in people's 401K choices at work.

Investors like these funds; according to the Wall Street Journal, the dollar value of assets in target funds ballooned from $7 billion in 1999 to $205 billion by mid-2008.  (The market slump deflated that figure to $164 billion.)

There's just one problem: investors, particularly those who had bought funds targeted at 2010 retirement, thought that diversification would protect them from last year's market slump. It didn't.  

As SEC Chairwoman Mary Schapiro testified before a Congressional hearing  in June:

The average loss in 2008 among 31 funds with a 2010 retirement date was almost 25 percent. In addition, varying strategies among these funds produced widely varying results. Returns of 2010 target date funds ranged from minus 3.6 percent to minus 41 percent.

It's not looking so good for the rest of us, either, as the Wall Street Journal reported:

The five-largest 2040 funds are down an average of 26% for the one-year period ended June 30, though at least those savers have more time to make up the shortfall.

Besides performance, critics of target funds say they lack consistency and transparency. And the hearings revealed  lots of misconceptions and misinformation among investors about these funds.

Indeed, start shopping and you'll see that even funds with the same target dates have varying mixes of investments.

Check out Vanguard's 2020 Fund, which includes 55 percent Total Stock Market Index, 30 percent Bond Index, 7 percent European Stock Index, 4 percent Pacific Index and 3 percent Emerging Markets. By comparison The T.Rowe Price 2020 fund has a lower bond proportion and more foreign stocks.

Which is the better approach? The argument for a more "aggressive" portfolio is that people are living longer and your retirement money will have to last longer, blah, blah blah. But balance that advice with the fact that last year, we saw up to a decade of "market gains" wiped out in just a few months. 

It's enough to make you just go into denial mode. But  chances are good that you'll be living a long life. So it's important to read up and understand where your retirement money is going.

One worthwhile investment  is an annual subscription to Morningstar and/or the Wall Street Journal. These sites offer you lots of good information about investing, as well as fund evaluations and comparisons so you can figure out which ones work best for you.

The big fund families, like Vanguard and Fidelity also offer lots of good info, although, guess what, they're probably not going to tell you to put your money into CD's.

Morningstar weighed in last month with some reform recommendations for target funds; you can read the company's suggestions here.  

And Marketwatch.com financial columnist Chuck Jaffe notes that, despite the problems, target funds remain a good choice for many investors. He makes the case below.

READ/ MORE

Here's the Wall Street Journal story on target funds from last spring.

Here's Morningstar's advice on how to choose a target fund.

WATCH

Chuck Jaffe on why target funds are still a good option for some investors.

WSJ's Karen Damato & Brett Arends offer advice for mutual fund investors.