Although it supports the Securities Exchange Commission’s goal of bringing more disclosure to target-date funds, the proposal to include asset allocation information in the fund’s name will only confuse investors, BackRock said in a letter to the agency this week.
Instead, the world’s largest investment management firm said the asset allocation disclosure should be presented by way of a required graph or chart. This would allow the plan participants to better visualize the fund’s glidepath and give them a better understanding of how asset allocation fluctuates over time.
The letter, written by Chip Castille, a managing director of U.S. defined contribution for BlackRock, was in response to the SEC’s request for public comments on the proposal to enhance target-date fund disclosure.
Target-date funds are currently given names that reflect the estimated retirement year. The problem with including the asset allocation target in the name, according to BackRock, is that investors could interpret the name as reflecting the fund’s current asset allocation instead of the targeted allocation at the time of retirement.
The firm also doesn’t believe the short-hand asset allocation name will not give investors a true understanding of the risks of the asset classes and sub-asset classes.
Rather than focusing on the targeted asset allocation of a target-date fund, BlackRock said that showing how the glidepath changes over time through a chart or graph would be a better way for investors to understanding the risks of the fund over time.
“Is an investor most concerned about what the asset allocation is going to be 30 years from now? Is that the most important thing to put in the name of a fund? More than likely it’s going to lead an investor to look at the name [of the TDF] and read something into it that it really isn’t,” said Barbara Novick, vice chairman and head of BlackRock’s government relations efforts.
The SEC’s efforts for enhanced disclosure for target date funds began in the wake of the market turmoil of 2008 when some TDFs lost as much as 40% of their value. The SEC has said that 2010 target date funds lost 24% of their value on average. Disclosure is especially critical because target-date funds are the primary defaults for 401(k) plans.
“In 2008 lots of things performed very poorly,” Novick said. “Target-date funds have a long holding horizon. It actually worked out fine because people who stayed invested made back their money in 2009. You can’t take a very short view.”
At the end of the day, the target-date fund is a good product for investors because it gives plan participants access to a professionally-managed diversified portfolio, Novick added. This is a much better option than people who are almost fully invested in company stock, which can be at risk if the company goes under, or a conservative fixed-income portfolio, which can’t keep up with inflation.
