Unless reasonable standards are established for target date funds, the Department of Labor should bar them from being used as default investments in 401(k) plans, the Certified Financial Planner Board of Standards Inc. said.
Unless reasonable standards are established for target date funds, the Department of Labor should bar them from being used as default investments in 401(k) plans, the Certified Financial Planner Board of Standards Inc. said.
Target date funds may be “fundamentally misleading to investors” because they are allowed to be managed in ways that are inconsistent with titles of the funds, CFP Board chairwoman Marilyn Capelli Dimitroff told regulators.
Target date funds have about $182 billion in assets under management, according to the Securities and Exchange Commission.
The use of a date in a target fund’s name implies that the fund would invest so that a participant could retire around that time, said Ms. Dimitroff. She is president of Capelli Financial Services Inc. of Bloomfield Hills, Mich., which manages $218.5 million, according to the firm’s ADV disclosure form.
Yet in 2008, target date mutual funds with 2010 in their name had losses ranging from 3.6% to 41%, said Ms. Dimitroff, who testified on behalf of the Washington-based CFP Board at a hearing on target date funds held last week by the Labor Department and the SEC.
“A loss of up to 41% of assets from a fund labeled 2010 is completely inconsistent with an investor’s reasonable expectation that his or her assets would not be subject to such high market volatility,” she said in her prepared remarks.
The CFP Board recommended that the SEC amend its rules to prohibit funds from using misleading names unless the fund’s investments fall within an acceptable range of asset allocations.
Establishing industry standards for target date funds is important because the funds are often used as default investments in 401(k) plans for workers who do not choose a particular investment, Ms. Dimitroff told the regulators. Appropriate ranges of asset allocations for the funds, based on accepted industry practices, should be established, she said.
Ms. Dimitroff cited the Thrift Savings Plan’s Lifecycle Funds for federal government employees and members of the armed services as an example of funds that have reasonable standards for asset allocations associated with specific time horizons.
If efforts to establish standards for the funds are not undertaken or prove to be ineffective, the Labor Department should act on its own to regulate the funds, or repeal their eligibility for use as default investments in 401(k) plans, she said.
Both the SEC and the Labor Department are considering new regulations for target date funds. At a speech to the Ridgewood, N.J.-based New York Financial Writers’ Association Thursday night, SEC Chairman Mary Schapiro said she has ordered SEC staff to examine “whether the use of a particular target date in a fund’s name is materially deceptive or misleading and should be prohibited.”
Alternatively, other rules requiring clarification when particular target dates are used in fund names will be reviewed, and the SEC also will reconsider disclosure requirements for the funds, she said.
Part of the variation among funds with the same date in their name is due to different equity allocations, Ms. Schapiro said. Equity allocations for target date funds with 2010 in their names ranged from 21% to 79% of assets, she said.
