A recent Wall Street Journal article (click here to read--subscription required) discusses annuity products that are available in target date mutual funds.

As indicated in the article, target date funds came under pressure after the financial crisis because of the losses (around 40 percent in some cases) of funds that were intended to be more conservative for near-term retirees.

Companies mentioned in the Journal article include:

It is reported that asset manager BlackRock has created a target date fund offering with an annuity for defined contribution pension plans.

It turns out that many target date funds are juiced by high yield or "junk" bonds.

The issue is that target date funds (which presumably become more conservative over time as participants age) are riskier than what is generally perceived by consumers, regulators and financial advisors.

This higher level of risk is consistent with the higher than expected volatility and losses experienced by many target date funds during the financial crisis.

Target-date funds were given a huge boost by the Pension Protection Act of 2006.

This legislation provides the basis for target-date funds to serve as default options in 401k plans.

The result is that 43 percent of people in their 20s held target date funds at the end of 2008.  Target-date funds attracted $41.8 billion in assets.

This is despite the fact that certain target-date funds labelled 2010 (i.e. presumably for investors retiring in 2010) lost as much as 41 percent in 2008.

Source: Bloomberg

Putnam, a large Boston-based money manager with $110 billion in assets, plans to move from 10 to 50 percent of the assets currently in its target date mutual funds into four different absolute return funds.

The move serves as a confirmation of the hazards that sequence of returns risk presents to near retirees and those who are recently retired.

Zvi Bodie is absolutely one of the most honest and refreshing voices in finance and economics.  Professor Bodie also happens to be an advocate of life-cycle investing.

Risk mitigation through diversification across time and space are fundamental tenets of conventional financial theory.

In other words, the idea is that stocks are safe in the long-run and risk or volatility can be reduced by owning assets in uncorrelated markets.

The problem is that stocks are not necessarily “safe” over any time horizon and correlations between asset classes tend to increase dramatically during times of market distress such as the past year and a half.

Target date funds are receiving attention from the SEC, the DOL and Congress.

The increased scrutiny is a result of the way that target date funds have performed during the market meltdown over the past year.

As reported recently, in theory target date funds are supposed to provide a smooth and somewhat automated transition from more risky assets to less risky assets as people approach retirement.