SEC Proposes New Measures to Help Investors in Target Date Funds
FOR IMMEDIATE RELEASE
Washington, D.C., June 16, 2010 — The Securities and Exchange Commission today voted unanimously to propose rule amendments to help clarify the meaning of a date in a target date fund’s name and enhance the information provided to investors in these funds as they invest for retirement.
Target date funds are designed to make it easier for Americans to invest for retirement by providing the simplicity for which many investors yearn. They’ve been marketed as a “set it and forget it” approach to investing. The name of these funds usually includes a date that represents the year in which the investor intends to retire.
The rule changes proposed by the SEC would enable investors to better assess the anticipated investment glide path and risk profile of a target date fund by, for example, requiring graphic depictions of asset allocations in fund advertisements. The rules also would require an asset allocation “tag line” adjacent to a target date fund’s name in an advertisement.
“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 Chairman Mary L. Schapiro. “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.”
Last month, as a first step to address potential investor misunderstanding of target date funds, the SEC issued an Investor Bulletin jointly with the Department of Labor explaining target date funds and various aspects that an investor should consider before investing in one.
The SEC is seeking public comment on the rule amendments proposed today for a period of 60 days following their publication in the Federal Register.
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What Are Target Date Funds? — Target date funds are designed to make investing for retirement more convenient by automatically changing the investment mix or asset allocation over time — and thus are intended to free investors from actively changing their asset allocations. Target date funds contain years in their names, which correspond to the year the investor plans to retire.
Most target date funds are designed so that the fund’s mix of investments — such as stocks, bonds and cash — will automatically change in a way that is intended to become more conservative as the target date approaches. This automatic asset allocation has been referred to as a fund’s “glide path.”
Since the inception of target date funds in the mid-1990s, assets held by these funds have grown considerably. Today, assets of target date funds registered with the SEC total approximately $270 billion.
Target date funds have become more prevalent in 401(k) plans because the Department of Labor has designated them as qualified default investment alternatives. That means that employers are protected from liability when investing an employee’s contributions in a target date fund, when that employee has not otherwise made an investment choice.
The 2008 Experience — The name of a target date fund often includes a date that reflects the year an investor plans to retire. For example, funds with names like “Portfolio 2030” or “Retirement Fund 2030” are designed for individuals who intend to retire in or near the year 2030.
But, just because target date funds share the same target date does not mean they share similar investment strategies and risks. In fact, the name does not guarantee that a person will have sufficient retirement income at the target date, or that an investor will not lose money.
The financial crisis of 2008 highlighted the volatility and variability even among funds that shared the same target dates. For instance, funds with a target date of 2010 averaged nearly 24 percent in losses in 2008. And, the losses for 2010 funds ranged between approximately 9 and 41 percent. In 2009, the returns continued to vary widely for 2010 target date funds, ranging between approximately 7 and 31 percent, with an average return of approximately 22 percent.
In June 2009, the SEC and the Department of Labor held a joint hearing on target date funds. A number of participants at the hearing raised concerns, particularly regarding investor understanding of the risks associated with, and the differences among, target date funds. One concern raised was the potential for a target date fund’s name to contribute to investor misunderstanding about the fund. Another concern raised was whether target date fund marketing materials provided to 401(k) plan participants and other investors may have contributed to a lack of understanding by investors of those funds and their investment strategies and risks.
The Proposed Rules
The Commission today proposed amendments to its 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.
Fund Name and Target Date Asset Allocation
The SEC’s proposal would require marketing materials for a target date fund that includes the target date in its name to disclose the asset allocation of the fund among types of investments. The types of investments — such as equity securities, fixed income securities, or cash — would need to appear with the funds name the first time the fund’s name is used.
Asset Allocation Table, Chart, or Graph
The SEC’s proposal would require marketing materials that are in print or delivered electronically to include a prominent table, chart, or graph that clearly depicts the asset allocations among types of investments over the entire life of the fund. These proposals would also require that the table, chart, or graph be immediately preceded by a statement explaining that the asset allocation changes over time, noting that the asset allocation eventually becomes final and stops changing, stating the number of years after the target date at which the asset allocation becomes final, and providing the final asset allocation.
Risks and Considerations
The SEC’s proposal would require target date marketing materials to include a statement informing the investor:
- 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 may be modified without a shareholder vote.
The SEC proposed changes to its antifraud 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 antifraud guidance would apply to all types of investment companies, including target date funds.