If you’re thinking of recommending a target-date fund to an individual or small-business client, or if any of your clients already own one—and considering their burgeoning popularity, they probably do—you better take a good, long look under the hood.

These one-size-fits-all funds, which are allocated and rebalanced according to an individual’s retirement date, have been widely criticized for being too pricey. But there’s another problem: They’re too heavily allocated to equities and fixed income, some analysts say.

Indeed, a new white paper from JP Morgan Asset Management entitled Ready! Fire! Aim? suggests that most target-date fund allocations do not manage market risk effectively enough—particularly considering that most participants contribute too little and borrow and withdraw too much from their 401(k) plans: 20 percent of participants borrow an average of 15 percent of their account balances; participants typically withdraw over 20 percent per year at or shortly after retirement; and contribution rates generally don’t hit 10 percent until an individual is 55, according to the study.

JP Morgan’s report suggests that to remedy the problem, target-date fund providers need to be less heavily weighted towards equities: “A broadly diversified portfolio that extends beyond conventional stocks and bonds to non-traditional assets (such as direct and public real estate, emerging-market debt and equity, and high-yield bonds) and brings to the individual participant the diversification and risk efficiency characteristic of sophisticated institutional portfolios, can lead to better income replacement,” says the paper.

Joe Nagengast, founder of Turnstone Advisory Group, which is conducting a study on the underlying asset allocations, fees, expenses, performance and risk in target-date funds, agrees. “The reliance on traditional asset classes has been too great,” he says.

Only a handful of asset managers, like Principal Financial Group, seem to be putting more creative asset allocations into place. “There is at least some indication that they are getting more creative. Everybody is talking about how they’re using real estate now; some people are using commodities. At least they’re exploring that.” According to a previous version of Turnstone’s study, Principal is one of the most diversified of the target-date fund providers, and the firm itself says: “Our portfolios include dedicated exposures to real estate, TIPS, high-yield bonds, preferred securities and emerging-market equities.”

Nagengast says hedging strategies (though not necessarily hedge funds themselves) would also make good additions to target-date funds. “In DC plans in general, it’s very rare to see alternative investments,” he says, because it wouldn’t make much sense economically for most 401(k) participants to invest in alternatives individually. But the scale of a target-date fund could make it more economically feasible.

Daniel Lucey, an analyst with Cerulli Associates, says other types of funds that incorporate mostly index funds could also make sense for participants. Despite their flaws, target-date funds are booming. Assets in these funds totaled $82 billion at the end of 2005, the latest date Cerulli has data for, up from $34 billion at year-end 2003. Meanwhile the number of funds has rocketed to 898, with 173 distinct portfolios, according to Nagengast.

JP Morgan conducted the study using its own retirement services database of 1.3 million participants. The 401(k) participants examined in the study had an average salary range of $30,000 to $70,000, and the analysis covered the period between 2001 and 2006.