More than two dozen industry and association representatives will weigh in on whether target date funds need to be redesigned at a June 18 hearing with the Securities and Exchange Commission and the Department of Labor.
Some believe that the design of funds, which are intended to become more conservative to achieve a specific mix of stocks and bonds at a set target date of retirement, need to be changed.
“The funds are fundamentally flawed,” said Lou Harvey, president of research and consulting firm Dalbar Inc. in Boston, who plans to testify this week. “There is no downside protection in them. You use one single variable — age — to make an investment allocation for an individual. There is also a lack of oversight from the SEC and DOL, and the manufacturers can do whatever it is that they want to do.”
Information given to investors about the funds needs to be more understandable, he said.
“Target date funds are a wonderful solution for the participant, but they are not comprehensive enough,” Mr. Dalbar said. “They [DOL] need to fix the flaws and block the holes that would allow mischief to creep in.”
In recent weeks, Putnam Investments chief executive Robert Reynolds has suggested ways to improve target date funds.
He called for regulators to consider a cap of 50% on the total equity allocation in the 10 years prior to retirement. To provide further protection against a market downturn, Mr. Reynolds suggested directing a quarter, a third or more of the portfolio into absolute-return strategies during the mature phase of the fund.
A third suggestion is to offer an annuity or other assured-income option to investors in the period beginning after age 55.
A representative of Boston-based Putnam is expected to testify at the hearing.
A representative of the
T. Rowe Price Group Inc. of Baltimore plans to discuss its glide path strategy, or how the allocation of stocks and bonds changes over time. For instance, the funds emphasize growth in the early phase. However, they become more conservative as retirement approaches, according to Heather McDonald, a spokeswoman for T. Rowe.
Still, some plan to advocate for no change.
“Plan sponsors are temporarily satisfied with their current target date programs, but they are very interested in new ideas and innovation,” said David Wray, president of the Chicago-based The Profit Sharing/401k Council of America. “As a result, we are hoping that the DOL would not do anything to stifle the innovation that we anticipate.”
One big concern is that government may decide to determine the mix of stocks and bonds allowed in a fund.
“I think that would be a significant mistake,” Mr. Wray said “The glide path is one of the areas where there is a lot of study under way. We are just at the beginning of the use and design of target date funds. We need to step back and let the innovation happen.’
