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Experienced investors know that when someone comes up with what seems like the perfect investment, it pays to be skeptical. That's a lesson that several employers have taken to heart recently with their retirement plans, but the solution they've come up with may not actually solve the real problem behind a controversial investment that created big losses during last year's bear market.

The travails of target funds
The investment in question is the target date retirement fund. A relatively recent innovation, target funds were designed to help investors find a one-stop shopping solution to their retirement planning. As marketed, the idea was that all an investor would need to do is to pick the year they plan to retire, and then buy the target fund that corresponds to that time frame. Over time, what started as an aggressive portfolio while you still had decades to go before you planned to retire would turn into a more conservative investment as you approached your quitting date.

Indeed, pretty much every target fund works this way. The problem, though, comes from the definition of "more conservative." During 2008's bear market, investors got slammed as they discovered that even funds with a target date of 2010 had a majority of their assets invested in the stock market, giving shareholders losses of 20% or more in some cases.

Taking matters into their own hands
As a response, some employers who sponsor 401(k) plans have chosen to design their own target funds to offer their employees. Dole Foods (NYSE: DOLE  ) , Intel (Nasdaq: INTC  ) , and Boeing (NYSE: BA  ) are reportedly among the 15% of large employers that are creating their own custom-made target funds.

It's understandable that employers are concerned about target funds and the impact that overly aggressive asset allocations can have on their workers' financial prospects. Retirement plan law imposes a fiduciary responsibility on employers that sponsor 401(k) plans to act in their employees' best interest. Although that duty doesn't force employers to manage their employees' 401(k) accounts for them, companies such as Ford Motor (NYSE: F  ) , Citigroup (NYSE: C  ) , and Tyco International (NYSE: TYC  ) have faced lawsuits from workers over 401(k) issues. Employers clearly want to protect themselves from any potential allegations that the target funds they have within their plans mislead workers.

Not addressing the point
Many workers will find it encouraging that employers want to take at least some responsibility for making sure their employees make smart decisions about saving for retirement. Over the years, as companies like IBM (NYSE: IBM  ) have frozen traditional pension plans and shifted workers toward 401(k)s, the trend has been for most employers to take less responsibility for helping their workers invest for retirement.

Yet while customizing investment options may help, it also sends a dangerous message. Employees might well conclude that a custom-made target fund must be exactly the right investment for them and therefore choose not to do the additional research they should to make sure the fund adequately addresses their individual financial needs.

If employers really want to make sure their employees have enough money after they retire, they should go back to the traditional pension model. With pensions, it's clear that employers retain sole responsibility to figure out how to save and invest in order to cover the monthly payments they make to their retirees.

In contrast, having employers try to take partial control of their employees' financial plans by tailoring limited investment choices within 401(k) plans is a dubious move at best. It's inherently inconsistent with the fundamental assumption underlying 401(k)s: that employees should take control of their own retirement.

Making plans better
Improving investment choices within a company's menu of 401(k) options is a worthy goal. But you shouldn't let yourself get lulled into the false sense of security that a target fund offers. Instead, take the time to learn what investments are best for you, and invest accordingly considering all the choices your employer gives you. Only then can you expect to save yourself from the next financial crisis.

Expecting Social Security to bail out your retirement? Think again. Chuck Saletta explains why the government won't be there for you.

Fool contributor Dan Caplinger mixes investments like a bartender mixing drinks. He doesn't own shares of the companies mentioned in this article. Intel is a Motley Fool Inside Value selection. Motley Fool Options has recommended buying calls on Intel. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is your crash-test dummy in a dangerous world.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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