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Enhanced Disclosure Requirements Favored For Target Date Funds



A batch of 29 new comment letters from advisors, mutual funds and insurers submitted to the Securities and Exchange Commission indicate a preference for “appropriately tailored enhanced disclosure requirements,” for target date funds, SEC officials said.

Target date funds held about $618 billion at the end of 2013, including $430 billion held in defined contribution plans and another $124 billion held in individual retirement accounts (IRAs). These funds play an important role in retirement savings for investors.

As many as 72 percent of 401(k) plans included target date funds in their investment lineups and many mutual fund companies offer target date funds through IRAs and employer-sponsored retirement plans.

“Generally, commenters have favored appropriately tailored enhanced disclosures requirements for target date fund marketing materials,” SEC Chair Mary Jo White said in an opening statement at the Investor Advisory Committee Meeting July 10.

White also said that some industry groups were concerned that “standardized risk measures could potentially confuse or mislead investors,” while other industry lobbies said using standardized risk measures would be useful.

SEC officials took a closer look at target date funds after the 2008 financial crisis. During the crisis, some funds saw a big drop in value just as they were approaching their advertised target dates, the time investors expected the funds to maintain their value as advertised.

The performance of some funds varied widely compared to other funds with the same target date, a reflection of the different risk characteristics among the funds.

Funds with a 2010 target date, for example, suffered losses in 2008 of between 9 percent and 41 percent, due to different asset allocation models, risk exposures and glide paths used by the funds, the SEC found.

Target date funds attract investors by simply advertising a year on which an investor plans to retire. In theory, these funds automatically shift assets to progressively safer investments the closer the investor approaches his or her retirement year.

A Target Retirement 2060 fund, for example, holds a large portion of its holdings in equities because the retirement date is more than 40 years out. A Target Retirement 2020 fund holds more of its assets in bonds and cash as the retirement date is only six years away.

The closer the fund approaches its “landing point,” the more “static” the allocation of the assets in the fund.

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As the 2008 financial crisis uncovered, however, asset allocations for funds advertising the same target or retirement date, are very different — and led to dramatically different performances.

Last year, an SEC advisory committee submitted five recommendations to amend SEC requirements governing fund literature, disclosure and marketing, and the SEC re-opened the comment period for industry participants.

The committee’s recommendations included developing a “glide path” illustration for target date funds based on a standardized measure of fund risk “as either a replacement for or supplement to its proposed asset allocation glide path illustration.”

Other recommendations include the development of a standard methodology to be used in risk-based and asset allocation glide path illustrations, the requirement that prospectuses disclose the assumptions used to design and manage the allocation, the adoption of warning labels that fund assets are not guaranteed, and fee disclosure information.

James H. Szostek, vice president of taxes and retirement security for the American Council of Life Insurers (ACLI), said the ACLI was in favor of the recommendations as they would help improve investors’ understanding of target-date investment strategies and asset allocations.

“As an illustration of these risks, ACLI recommends that the risk be explained through text rather than illustrated,” Szostek said in written comments. “Such text should address market risk with a statement that a fund is not guaranteed and that it is possible to lose money.”

The Investment Company Institute (ICI), the main trade lobby for the mutual fund industry, raised concerns about using a glide path scenario and applying conventional risk measure to target date funds. Investors may also be “confused and potential misled” by risk metrics.

“Target date fund investors are not necessarily knowledgeable enough to recognize the limitations of risk metrics and likely would place too much confidence in such metrics,” said Dorothy Donohue, ICI acting general counsel.

The U.S. Department of Labor (DOL) has also proposed to amend disclosures and require a glide path illustration for target date funds subject to the Employee Retirement Income Security Act (ERISA).

The comment period for that initiative closed earlier this month. DOL is considering the comment letters received by the SEC.

is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at

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Leave trial and error behind with this powerful tried and true presentation.