On June 16, the SEC unanimously approved of proposed rule changes to improve disclosure of the risk factors in target-date funds – an estimated $270 billion market. The SEC now wants to require the marketing materials for target-date funds to include a visual depiction such as a table, chart or graph which would show the fund’s glide path over time. And those materials must also include a statement of the fund’s asset allocation at the “landing point” or the participants’ anticipated retirement date. The SEC also wants issues of target-date investment funds to use tag lines to describe the asset allocation of the fund. The tag line which would come immediately after the fund’s name should say what percentage of the assets are in stocks, bonds and cash.
Simply requiring investment managers to add warnings to prospectuses and related documents are not enough because “investors in target date funds are, almost by definition, not active market observers or researchers,” said SEC Chairman Mary Schapiro on June 16.
Target-date funds, which include mutual funds and investment options on variable annuity and variable life investment menus, are pegged to a person’s expected retirement year. The funds rose in popularity for plan sponsors after the Pension Protection Act of 2008 defined them as “qualified default investment alternatives.” That meant that the sponsors of the funds – the corporate employer – could not be sued when it invested a worker’s contribution in a target-date fund if the employee didn’t make another choice.
Target date funds allocate investments in different asset classes over the life of the fund and are supposed to become more conservative as workers near their retirement age. But that wasn’t always the case as indicated by the major losses they suffered in 2008 and 2009 during the market downturn. Some funds had invested in junk bonds while others had more aggressive asset allocation “glide paths” leaving near retirement investors exposed to higher levels of stock.
In their letter to the SEC, Senator Tom Harkin (D-Iowa), chairman of the health, education, labor and pensions committee, Herb Kohl (D-Wisconsin), chairman of the aging committee and HELP Committee ranking member Michael Enzi (R-Wyoming), urged the SEC to broaden the scope of disclosures required in marketing materials to include a clear statement on the age group for whom the fund is designed; the relevance of the date used in the fund’s name; the fund’s assumptions about the investor’s withdrawal intentions after reaching the target date; the rationale behind the glide path used in the target-date fund; and whether the target date fund is intended to be a fund of funds. If it is, they said that the target-date fund should disclose whether any of the underlying funds are affiliated with the target-date fund’s manager.
“Clear, prominent disclosure of such information is necessary to ensure that those investing in target-date funds can clearly understand the nature of the investment and are not confused by the fund’s name,” said the lawmakers. The senators also said that they supported the use of graphs and accompanying statements or narrative in a prominent place in the advertisements for target-date funds.
Those graphs should contain information concerning the investment composition of the fund at the starting date, the target date and the final allocation in retirement. However, those graphs should not contain so much information that it will confuse investors, said the lawmakers. And those graphs, said the senators, should be presented in such a way to allow greater comparison of target-date funds within a family of funds of an investment manager as well as comparison with other target-date funds on the market.
Chip Castille, managing director and head of U.S. defined contribution for Blackrock, also warned the SEC not to require too much information that investors would be confused. However, any graphs or charts should clearly allow investors to understand how asset allocation changes over time. Any text accompanying the chart or graphic would also disclose what types of investments should be included in each asset class, and an explicit statement that investors not be lulled into false sense of security that their investment is safe. Instead they should review their investment decisions periodically.
Securities Technology Monitor