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For retirement investors who don't want to spend a lot of time managing their investments, a target retirement fund sounds like the perfect one-stop choice for their portfolios. Unfortunately, target funds have disappointed many investors over the years, and now, a new wrinkle suggests that further disappointments may be inevitable.

Luckily, there's an easy solution to avoid the problems that target funds have. But before I get into that, let's take a look at some of the controversies that target funds have stirred up over the years.

Targeting your retirement
The concept of a target retirement fund melds risk tolerance and asset allocation strategies into a single mutual fund. The way a target fund works is that each fund has a year assigned to it. If you're planning on retiring in or around that year, then the fund is designed around a changing asset allocation strategy tailored toward that particular time horizon. By following what's known as a "glide path" of more conservative investing allocations as you approach retirement, the target fund mimics the advice that most financial planners give.

In practice, what this means is that when you're young and retirement is far off, your target fund invests almost exclusively in stocks. But as you get older, more of your money gets transferred to bonds and cash.

That all sounds fine. But when stocks crashed in 2008 and 2009, many target fund investors were surprised at just how much money they lost. Even those with funds targeted for near-term dates discovered that they had huge stock exposure in their investment mix -- exposure that cost them double-digit percentage losses during the market meltdown.

In response, several target fund companies took action. Schwab (NYSE: SCHW  ) and Oppenheimer Holdings (NYSE: OPY  ) OppenheimerFunds unit cut their stock allocations in their target funds. Principal Financial (NYSE: PFG  ) and T. Rowe Price (Nasdaq: TROW  ) added new asset classes in their funds, including commodities and real estate.

What you see isn't what you get?
More recently, though, another problem has emerged: Many funds routinely make changes to their glide paths, making it impossible for target fund shareholders to predict exactly how their fund will actually invest at any given point in the future. An Ibbotson study pointed to one fund family that saw its stock allocation for funds intended for 60-year-olds go from 34% to 53% in just four years. That obviously makes a huge difference in how aggressive a target fund is -- and how much risk it holds in a market downturn.

That's not just a problem for investors. Target funds have gotten extremely popular among 401(k) plans because of their simplicity. But plan sponsors have some responsibility over how their investment choices work, and the uncertainty over how a target fund will invest over the long haul creates tension about potential liability plan sponsors have to workers.

Guarantee your own path
The simple way to target your own retirement investing strategy is to use just a few exchange-traded funds to do it yourself. Sure, it may seem like a lot more hassle, but it's not that much work, and it's the best way to make sure you get exactly what you want. Here's what to do:

  • Find a broker that gives you commission-free ETF trading for simple index ETFs. You'll want at least a broad-index U.S. stock fund like Vanguard Total Stock (NYSE: VTI  ) , an international stock fund, and a bond fund such as iShares Barclays Aggregate Bond (NYSE: AGG  ) . Add further ETFs if you want more diversification. Brokers including Fidelity, TD AMERITRADE (Nasdaq: AMTD  ) , Schwab, and Vanguard all offer commission-free ETF deals with those attributes.
  • Figure out how to allocate your money now. Get tips to figure out your ideal allocation here.
  • Put together a plan for how you'll change those allocations in the future. This will depend on your risk tolerance as well as how your investments actually perform, but it's something you should only have to do about once a year or so.

Be sure
Your retirement is far too important to leave in other people's hands. By taking control of your own retirement investing, you'll make sure you hit whatever target you set for yourself.

ETFs are useful for more than just building your own target retirement fund. The Fool's special free report, "3 ETFs Set to Soar During the Recovery," gives you some winning picks for uncertain times.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.

Fool contributor Dan Caplinger is the do-it-yourself investing king. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of T. Rowe Price Group. Motley Fool newsletter services have recommended buying shares of Schwab. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always hits the target.

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