I just grievously misused this phrase in a writeup, so I guess it's time that we had a definition.
'Functional ingredients' and 'functional foods' are poorly defined terms, but in general, a functional ingredient is anything that is added to (or sometimes simply present in) a food in order to increase the nutritional value.
Functional ingredients may refer to ingredients that convey some health benefit above and beyond fulfilling basic nutrition. Isoflavones, antioxidants, Omega-3 fatty acids, plant sterols, the bacteria found in yogurt, all of these are healthful but not listed on the RDA labels.
But sometimes a looser definition is used, and the functional ingredients include all the vitamins that have been used to artificially enrich your breakfast cereal.
The British Nutrition Foundation proposed this definition in 2004: "a dietary ingredient that affects its host in a targeted manner so as to exert positive effects that may, in due course, justify certain health claims". In other words, anything that might help keep you healthy.
http://www.beverageinstitute.org/nutrition/functional_ingredients.shtml
http://www.nutrition.org.uk/upload/Functional%20Foods%20pdf.pdf