Target date fund disclosure plan falls short of the mark, say critics

SEC's proposal to boost info for investors doesn't go far enough, they claim; ‘advice in a vacuum'

Jun 17, 2010 @ 3:53 pm

By Darla Mercado

Fund industry participants lauded the SEC's latest attempt to boost target date fund disclosure — but say that more could be done to help clarify the investments for participants.

The Securities and Exchange Commission announced yesterday that it was considering a rule requiring fund companies to spell out a fund's asset allocation at the target date — including marketing materials that depict the glide path over time. The regulator may also mandate that target date fund operators to include a statement in their marketing material warning investors to consider their risk tolerance and financial situation.

While there is no disagreement that the changes would be helpful, some industry watchers say the proposed rules don't go far enough. Specifically, they'd like the SEC to require a fund operator to tell investors upfront whether a fund is being managed with the goal of liquidation at the target date or 20 years beyond it.

Funds that are managed up to their target dates tend to drastically reduce equities holdings as investors near retirement. Funds that are managed beyond their target dates — or through retirement — tend to maintain high equity positions.

The proposed rules attempted to demystify that issue and highlight the fact that funds with the same target dates don't necessarily have the same asset allocations. Some industry participants argue that the SEC could have required that fund companies simply state the date when investors are supposed to liquidate the fund.

“All you have to do is put in the right name of the fund,” said Joe Nagengast, principal and founder of Target Date Analytics. “What I want to know is, will the money I'm putting away be there when I retire, or are you going to gamble it for another 30 years? That doesn't translate.”

He added that a participant in a 2010 fund “has to learn that 2010 means 2040.”

Lynette DeWitt, director of research at the Financial Research Corp., argues that the best way to demystify the holdings for investors is to require the asset allocation strategy to be embedded in the fund name. “Since investors aren't required to read marketing materials or the prospectus prior to having funds selected for them as [qualified default investment alternatives], at least the enhanced fund name would provide some at-a-glance insight,” she said.

Others noted that the SEC needed to address the funds as QDIAs, and that the proposed rules need to distinguish whether the investor chose the fund himself or did the employer choose it.

The rules are “advice in a vacuum,” as participants won't know how to interpret the asset allocation information or how to examine the fund in context with their financial situations, said Richard Michaud, president and chief investment officer at New Frontier Advisors LLC.

“As long as [the target date fund] is a default retirement fund and granted fiduciary relief, then there is no mandate or imperative to help people understand more about it than they do,” he said.

It's not clear what the fund industry itself makes of the SEC's proposals.

The Investment Company Institute, which represents mutual fund companies, is waiting to review the proposals, said Inga Vitols, spokeswoman for the group. “ICI supports the SEC's continued efforts to enhance investor understanding of target-date funds,” she said, but declined to elaborate.

Marcia Wagner, managing director of The Wagner Law Group, which specializes in the Employee Retirement Income Security Act of 1974, said that mutual fund companies might take issue with the fact that they would have to state when a fund is at its most conservative — its “landing point.”

Still, she thinks mutual fund companies would be wise to back the proposals. “If the industry pushes back, they're making a mistake,” Ms. Wagner said. “This disclosure is fairly innocuous and commonsensical.”

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