The idea behind target-date mutual funds couldn’t have been simpler, which was one of their great selling points. They were the cruise control investment option for retirement savings.
Just put your cash into a fund that matched your time horizon, the year 2020 for example, and an investment company would manage the money with that retirement assumption in mind. Investments for youngsters would swing for the fences, and money managed for people nearing retirement would be handled with an increasingly conservative bias.
But most simple things are revealed to be more complicated beneath the surface after they run into trouble. Target-date mutual fund investors discovered just that when their money met the financial hurricane of 2008.
Older investors with money in some 2010 target-date funds got a particularly expensive surprise. A few lost as much as 40 percent of their nest egg in 2008.
Some investment companies had different ideas about the actual investment objectives of their funds. Some employed different strategies to achieve them. Some were just awful.
The predictable response led to hearings in Washington yesterday. Dozens of investment company executives, industry analysts, and consumer advocates appeared to testify before the Department of Labor and the Securities and Exchange Commission.
The question of the day: Should government impose more rules on target-date funds to protect investors? The right answer: Yes, but not the way you might think.
There is a lot of money riding on that answer. The fund industry manages about $187 billion in target-dated funds, as of September, and those funds are grabbing a huge share of the cash coming in the door.
About 20 cents of every new dollar contributed to a 401(k) retirement plan is expected to go into target-dated funds by next year. While customers withdrew $165 billion from all other funds last year, they gave $42 billion to lifecycle funds, according to Morningstar.
Government officials have something at stake, too. A 2006 law allowed employers to use target-date funds as default options for workers who enroll in 401(k) plans. Is that still a good idea?
Overall, target-date funds performed the way they were supposed to last year. Long-range funds lost an average of about 40 percent; the average 2010 fund declined by 25 percent. The benchmark Standard & Poor’s 500 index lost 37 percent.
Averages aside, the actual return of 31 competing 2010 funds varied widely. Those funds all looked a lot alike on the outside, but were very different kinds of investments.
Asset allocation - how money was split among stocks, bonds, and cash - was one big distinction. Many investment companies argue in favor of big stock holdings, which should earn more over time because most retirees will count on their money for 20 years or longer into the future. Shareholders may outlive their retirement funds if they invest too conservatively, fund companies say. But stocks were much bigger losers last year.
Vanguard Group argues that asset allocation at an even deeper level separated many of the 2010 fund winners from the losers. The kinds of stocks and bonds, risky or conservative, chosen by target-date funds mattered, too.
Finally, individual fund managers made a difference. Investment companies send target-date fund money to other stock, bond, and money market funds they manage. Some of those funds actually investing the money did well, and others disappointed.
Oppenheimer Transition 2010, one of last year’s biggest target-date dogs, lost 41 percent in 2008. The fund directed about 20 percent of its money to the Oppenheimer Core Bond fund, a seemingly conservative option that plunged 36 percent.
The knee-jerk solution: Limit how much money funds approaching their target date can put into stocks. That’s a bad response to a complicated investment problem.
The threat of outliving retirement assets is real, and stocks could be part of the answer. It’s more important to understand what you own. Many target-date shareholders would fail that test, and it isn’t all their fault. Money managers have done a terrible job of explaining the risks and assumptions.
Target-date funds are sold as an easy solution to one of life’s biggest financial challenges. The truth is more complicated, and fund companies should be responsible for making everyone understand that.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com. 
