The U.S. Securities and Exchange Commission (SEC) voted unanimously on June 16, 2010, to issue proposed rule amendments to clarify the meaning of a date in a target-date fund’s name and to enhance the information provided to participants in these funds.
Target-date funds are marketed as a “set it and forget it” approach to investing within 401(k) and other defined contribution retirement plans. The name of these funds usually includes a date that represents the year in which the investor intends to retire. Passage of the Pension Protection Act in 2006 added momentum to the growth of target-date funds, as the legislation supports automatic enrollment programs using a qualified default investment alternative (QDIA), which includes target-date funds, among others. According to a report by the Profit Sharing /401k Council of America, in 2009 more than 60 percent of surveyed U.S. plan sponsors used target-date funds as their default option and 17 percent provided target-date funds as a stand-alone option.
The proposed rules would take the form of amendments to the SEC's mutual fund advertising rules, Securities Act rules 156 and 482, and Investment Company Act rule 34b-1. The rules would address the concerns regarding the potential for investor misunderstanding stemming from target-date fund names and marketing materials.
The rule changes proposed by the SEC would require the disclosure of additional information to help investors assess the risks associated with target-date funds and to gain a better understanding of a particular fund's "glide path" (i.e., the shift in holdings from stocks to less-volatile bonds and cash as the target date nears). This would be accomplished by, for example, requiring graphic depictions of asset allocations in fund advertisements.
The rules would require an asset allocation “tag line” adjacent to a target-date fund’s name in disclosures and marketing materials. For example, a 2020 target date might carry a tag line stating, "40 percent equities, 50 percent fixed income, 10 percent cash in 2020."
“These proposed rule changes would help clarify the meaning of the date in a target-date fund and improve the information provided when these funds are advertised and marketed to investors,” said SEC Chairwoman Mary L. Schapiro, in a released statement. “Together these rule amendments are designed to foster investor understanding of target-date funds and reduce the possibility that investors will be confused or misled.”
Marketing Material Messages
The SEC's proposal would require target-date marketing materials to do a better job of informing investors that they could lose money in a target-date fund. Marketing materials would be required to include a statement informing investors:
• To consider the investor’s risk tolerance, personal circumstances and complete financial situation.
• That an investment in the fund is not guaranteed and that it is possible to lose money by investing in the fund, including at and after the target date.
• Whether, and the extent to which, the intended percentage allocations of a target-date fund among types of investments might be modified without a shareholder vote.
The SEC proposed changes to its anti-fraud guidance to note that a statement in marketing materials suggesting that securities of an investment company are an appropriate investment could be misleading because of:
• The emphasis it places on a single factor, such as age or tax bracket, as the basis for determining that an investment is appropriate.
• Representations that investing in the securities is a simple investment plan or requires little or no monitoring.
The proposed amendments to the anti-fraud guidance would apply to all types of investment companies, including target-date funds.
Stephen Miller is an online editor/manager for SHRM.
Plan Sponsors Misunderstand Target-Date Funds, SHRM Online Benefits Discipline, November 2010
Most Big Employers Auto Enroll, Restore 401(k) Match, SHRM Online Benefits Discipline, July 2010 (Discusses how a majority of large companies are using target-date funds as their default option, but may select funds unaffiliated with their record keeper.)
Labor Department, SEC Issue Target-Date Fund Guidance, SHRM Online Benefits Discipline, May 2010
Target-Date Funds Bounce Back in Retirement Plans, SHRM Online Benefits Discipline, March 2010
Participants Mostly Satisfied with Target-Date Funds, SHRM Online Benefits Discipline, October 2009
Many Misunderstand, Misuse Target-Date Funds, SHRM Online Benefits Discipline, December 2009
SEC’s Target Fund Ruling Misses Bull’s-Eye, CBS MoneyWatch.com, June 2010
SHRM Online Benefits Discipline