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“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. This is especially important since target-date funds were the primary defaults for 401(k) plans. In addition, during the market crash of 2008, the Oppenheimer Transition 2010 Fund tumbled 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 connect in order to 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,” for instance. 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.
While some funds lost 9% of their value, others lost as much as 41%, faring only slightly better than if an investor had parked their entire nest egg in the S&P 500. 2010 target date funds lost 24% of their value on average, the SEC says.
An early response from the mutual fund industry group Investment Company Institute (ICI) is cautiously supportive of the move. “ICI supports the SEC’s continued efforts to enhance investor understanding of target date funds,” a spokeswoman says. “We look forward to reviewing the proposal when it becomes available and formally commenting on it.”
Howard Stock contributed to this story
