The Securities and Exchange Commission voted 5:0 Wednesday to require target-date funds to do a better job of explaining the purpose of their retirement date, how their asset-allocation glidepaths change over time, and, in a new twist, to include easy-to-understand visuals in ads.
“Many individual investors are understandably overwhelmed by multiple investment choices and increasingly complex investment products,” said SEC Chairman Mary L. Schapiro.
The disclosures are designed to better illuminate target-date funds for investors, in light of target-date funds as the primary defaults for 401(k) plans—not to mention the market crash of 2008, which brought down one 2010 target-date fund, the Oppenheimer Transition 2010 Fund, by 41%.
“Target-date funds are designed for investors who do not routinely monitor market movements or realign personal investment allocations,” Schapiro said. “However, the experience of 2008 revealed that target-date funds did not perform as many retail investors expected. While target-date funds’ returns turned positive in 2009, the variability continued, with returns ranging from 7% to 31%.”
SEC analysis has shown target-date fund equity performance, over the life of their investments, to date, to range from 20% to 65%. “Given the variability of returns of target-date funds in 2008—and again in 2009, it is clear that investors need more information than just the date in a fund’s name—they need [to help investors] evaluate what the date means and what the fund’s projected investment glidepath is,” Schapiro said.
The new requirement to explain the purpose of the target-date is simply whether that year is the retirement goal or 20 to 30 years of living beyond that time. By requiring investment advisors to do a better job of explaining a fund’s holding, asset allocation strategy and investment philosophy, the goal is to better meet an investor’s conservative, moderate or aggressive expectations.
The “tagline” proposal, for instance, would permit an investment advisory firm to say “40-45% in equity." Also, the SEC will encourage investment advisors and 401(k) sponsors to remind investors to periodically revisit their holdings and personal financial goals. While target-date funds are designed as set-it-and-forget-it options, people’s lives change over time. As do their financial needs.
In closing her remarks on the new target-date fund rules Wednesday at the SEC’s open forum, Schapiro thanked seven individuals who worked on the measure, including Investment Management Director Buddy Donohue. In recent months as the SEC has stepped up its cases against investment banking firms and credit rating agencies, Schapiro has increasingly turned to her staff for help—and publicly called out to thank them.