July 29, 2012
The Proposed Rule risks encouraging unsophisticated investors to simply synchronise their planned retirement dates with the date in the title/header of the investment offering. The Rule, if adopted as proposed, confers a superordinary importance to the date where the management between the investment and the horizon date is of greater concern.
Further, while the date is important as an anticipated horizon for the portfolio held therein, the historical trend of such funds (with a superlinear change in allocation toward debt instruments over time) may be less "conservative" than historically thought, given the dubious quality of once-robustly-rated instruments floating around in the debt market. For an example, one need only notice the rise in municipal bankruptcies (and, meanwhile, the still-heavy investment in municipal debt among retirement-oriented funds). Allowing uninformed or less-sophisticated investors to assume that - as a given date approaches - a portfolio will automatically be reshuffled to an ever-lower-variance or ever-lower-risk posture could be dangerous and is potentially-misleading.
Finally, making the horizon date of the portfolio central to the portfolio's marketing and title encourages investors to sort funds on this basis. Given the flexibility (and uncertainty) of American retirement dates in the current economic environment, emphasising the horizon date of the portfolio in question may cause investors to exclude investments well-suited to their needs.
For the reasons herein, I respectfully recommend against the Proposed Rule.
The sentiments and recommendations herein are my own and may not represent the views or opinions of the organisations and institutions with which I am affiliated.
Karl T. Muth
Lecturer in Economics
Northwestern University