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U.S. Securities and Exchange Commission

Improving the Quality and Outcomes of Retirement Planning


Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

The American Retirement Summit
Washington, D.C.
November 3, 2011

Thank you. In particular, I would like to thank Keith Green for inviting me to be here. It is a pleasure to be with you at the first American Retirement Summit. It’s never before been more important to have a fulsome discussion on how to improve the quality of retirement planning for all Americans. Before I continue, however, I need to say that the views I express are my own, and do not necessarily reflect the views of the Securities and Exchange Commission, my fellow Commissioners, or members of the staff.

I don’t want to be alarmist, but I do want to speak frankly. I am concerned about the increasing challenges confronting the hardworking men and women of this country as they head into their retirement years. At a time when almost half of American adults say that the financial goal that is most important to them is having enough money for retirement,1 there is no question as to the importance of improving the quality and outcomes of retirement planning.

Let’s spend a bit of time discussing the scope of the problem. As we gather here today, America is in the midst of a retirement crisis. All across the nation, Wall Street’s wild swings and steep losses have been throwing retirement accounts into disarray. When the financial markets imploded in 2008 and the first quarter of 2009, many investors’ portfolios lost 30% of their value virtually overnight.2 In the last quarter alone, investors have watched $2.5 trillion disappear from the market.3 The continued volatility of the market has stirred some deep seated fears for many Americans about their financial future. I worry about Americans who have done everything right and now, due to circumstances beyond their control, are facing a bleak employment picture and less retirement savings than they envisioned.

More than one-quarter of Americans polled in a new survey said that the best place to stash their limited savings is underneath their mattresses.4 Another poll just found that the majority of Americans are worried that they will not have enough savings for their retirement.5 Due to the collapse of the housing market and the financial crisis, trillions of dollars that Americans were counting on for retirement has been lost.

The ramifications are stark. According to a survey released by the AARP, one in three workers has considered delaying retirement,6 and the number of investors taking loans on their 401(k) accounts is increasing.7 Moreover, in the last year, one in five middle-aged workers stopped contributing to their retirement plans because they had trouble making ends meet.8

In a recent consumer study, 21% of the individuals surveyed reported that winning the lottery was “the most practical strategy for accumulating several hundred thousand dollars” of wealth for their own retirement.9 In addition, 16% thought that winning the lottery was the best retirement strategy for all Americans, not just themselves.10

The financial crisis has also had a disproportionate impact on minority communities across the country. A recent survey found that African Americans and Hispanics were more likely to lose jobs, face foreclosures, and lose health insurance coverage.11 The survey also highlighted that only 46% of African Americans and 32% of Hispanics indicated that they participated in an individual retirement account, or any similar retirement plan. The same survey stated that only one in six Hispanics, and one in four African Americans, reported owning stocks, bonds, or mutual funds. By contrast, 50% of whites indicated that they own stocks, bonds or mutual funds, and two-thirds indicated that they held IRAs, 401(k)s, or had other similar holdings.12

It’s clear that retirement security is one of the greatest casualties of the financial crisis. Many find themselves in dire straits. Other individuals will need to keep working past the normal retirement age in order to have sufficient resources to live, much less fund their retirement.

Furthermore, in this dire financial environment, individuals are increasingly being asked to be in charge of their financial security throughout their lifetime and after retirement. Since 1980, there has been a rapid shift away from private sector employer-based defined benefit pensions to employee-controlled personal retirement accounts. In 1980, approximately 64% of private sector retirement contributions were to defined employer benefit pension plans.13 However, by 2010, about 49% of private sector employees contribute to an employee-controlled personal retirement plan.14

With the shift from defined benefit to defined contribution pensions, individuals have to decide not only how much to save, but also how to invest their assets. Moreover, these decisions have to be made in a financial market that has become exponentially more complex with financial products and investment strategies unheard of just a few years ago — such as target-date funds, exchange-traded funds, asset-backed securities, and long-short strategies. A significant issue remains whether investors are at an information asymmetry disadvantage when it comes to these products and what the solutions should be.

And, on top of the lost savings, many Americans facing retirement or already retired are falling prey to scam artists and fraudsters. As a recent SEC Investor Alert makes clear, one area in which fraudulent investment schemes are on the rise involves Self-Directed Individual Retirement Accounts (“Self-Directed IRAs”).15 According to a 2011 report by the Investment Company Institute, investors held approximately $4.7 trillion in IRAs.16 As individuals exert more control over their retirement assets, they are encountering many fraudsters and scam artists attempting to steal their retirement assets. Over the past few years, the Commission has seen a number of cases where unscrupulous promoters have lured investors into transferring money from their 401(k) or other institutionally maintained retirement accounts into Self-Directed IRAs.17 They then find themselves the victims of Ponzi schemes or other fraudulent transactions. For example, the Commission recently filed charges in a mater in which at least $20 million was raised from Self-Directed IRA’s.18 The defendants in this matter lured prospective investors by promoting estate planning seminars to retirees and near-retirees.19 The defendants then offered the opportunity to invest in promissory notes that they represented paid guaranteed returns of between 8% and 11%.20 Unfortunately, the enterprise turned out to be a Ponzi scheme.

All of this highlights the importance of today’s Summit and the efforts of the American Retirement Initiative to help educate American workers about preparing for retirement.

Investors deserve information that demystifies the retirement planning process and the risks associated with investment products. It troubles me to hear stories of investors who are invested in products that are economically not in their best interest, when there are other similar financial products that could provide greater reward and less cost. Today’s Summit is an important first step in what I hope will be a continuing dialogue between the private, governmental, nonprofit, and academic sectors on improving the quality and outcomes of retirement education in the United States.

I have a profound respect for how hard people work for their money, and the need to be vigilant in protecting their investments and retirement assets. Today, I want to offer my thoughts on how the SEC can play a role to improve the quality of retirement outcomes in these difficult economic times for investors.

During the remainder of my time today, I want to discuss the following:

  • First, I will take a few moments to describe the SEC’s functions, with particular emphasis on the SEC’s role as to the timing and quality of the disclosure being provided to investors;
  • Second, I will discuss the SEC’s efforts to improve financial literacy, as well as the financial literacy study requirements set forth by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”);21 and
  • Third, I will highlight the risks associated with the investment products in the marketplace that have been targeted toward retirees over the past few years, and how the SEC can play a role in providing investors the necessary tools in order to make better investment decisions.

The SEC’s Role

A key component of the SEC’s mission is to protect investors. The SEC does this in various ways. For example, the SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisers, and mutual funds. In addition, the SEC is responsible for enforcing compliance with the federal securities laws. Each year, the SEC brings hundreds of civil enforcement actions against individuals and companies for violations of the federal securities laws. Typical infractions include insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them.

One way that the SEC protects investors is by requiring that public companies disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors and other third parties to use to judge for themselves as to whether to buy, sell, or hold a particular security. Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions.

The Commission’s role as the Nation’s “capital markets regulator” and as the “Investor’s Advocate,” requires that it work to proactively safeguard investors. This means more than being ready to put out fires — it means helping to prevent fires in the first place.

For me, investor protection is at its best when we prevent or deter harm in the first instance. I have a healthy respect for the importance of financial literacy and how it provides individuals the ability to understand the functions of financial transactions and products. But improving financial literacy is only one part of the equation. The foundation to effective investor protection and, in my view, improved retirement outcomes, is to make sure that investors receive clear, comprehensible, and transparent disclosure describing the securities and products that they are purchasing. Moreover, a strong foundation also requires that the rules of the marketplace are fair for all.

That’s why the SEC’s disclosure requirements are essential to investor protection. Investors require a regulatory environment where investors receive disclosures that are accurate, timely and comprehensible, and that, among other things, clearly provides a window into the risks that exist as to any particular investment.

Studies have shown that many investors have a hard time understanding disclosure documents, due to their complexity.22 In a study conducted in 2008, the primary complaint among investors was that the disclosure documents contain too much legal jargon, and as a result, the disclosure language is often too complicated or difficult to understand.23

The findings of this 2008 study came ten years after the Commission adopted a rule that promoted the use of plain “English” in disclosure documents.24 In 1998, the Commission adopted a rule that instructed companies to incorporate short sentence and the use of everyday language into its disclosures.25 I applaud this effort; but I do not think we have made it to the goal.

In my experience, simple clear communications help empower investors to make investing decisions that are in their best interests. Clear communications increases a retail investor’s ability to make informed investment decisions, particularly if the information is packaged in a format and context that is understandable and actionable by an average investor.

I believe that the Commission must continue to explore ways to encourage issuers to provide more informative and useful disclosure materials to investors, including a clearer, more comprehensible discussion of the nature of risk of a particular investment.

SEC Investor Education Initiatives

Even as the SEC works to improve our disclosure regime, efforts are also needed to help investors become better educated. In the face of this economic crisis, many investors feel helpless, and that is understandable. For most of us, we’ve never received any training in how to manage our financial assets. Financial literacy is rarely taught in middle schools, high schools, or even universities.

The SEC has undertaken certain initiatives to educate investors. For example, in October 2009, the SEC launched www.Investor.gov, a website focused exclusively on investor education.26 This website was created to help investors educate themselves on issues affecting their investment decisions. Individual investors who access this website can learn information on a variety of investing topics, including how to research investment and investment professionals, understand fees, and detect fraud. The content is designed to be easily understandable, including the “Investing Basics” section, which explains common retail investment products in plain language.

The Dodd-Frank Act and Financial Literacy

Congress has also identified financial literacy as a high priority. Section 917 of the Dodd-Frank Act requires the Commission to conduct a study of financial literacy among investors and submit a report on the study to the Senate Committee on Banking, Housing, and Urban Affairs, and the House of Representatives Committee on Financial Services, by July 21, 2012.27 The study mandated by Section 917 contains a number of specific components, including that the study identify:

  • The existing level of financial literacy among retail investors;
  • Methods to improve the timing, content, and format of disclosures to investors with respect to financial intermediaries, investment products, and investment services; and
  • Methods to increase the transparency of expenses and conflicts of interest in transactions involving investment services and products.

To fulfill this requirement, the SEC is currently working on a project plan, including developing an organizational framework, an analysis of required resources, and a calendar of expected completion dates of various project milestones.28

While I look forward to the results of the study, it is clear to me that any solution that addresses financial literacy in a passive way will not solve our financial literacy problem. Maintaining informational websites on investor education and financial literacy alone is clearly not enough to achieve acceptable financial literacy. Greater outreach efforts are needed to educate investors, and there should be dedicated efforts to those in communities of color that are isolated from mainstream financial services.

The SEC has a role to play in basic investor education and, although the SEC has limited resources, it needs to do more. It’s certainly not doing all that I would want it to.

Target-Date Funds

One area where the SEC can have a positive impact in assisting retirees, is to provide greater regulatory focus on investment products that are targeted towards retirees. One such example involves target-date funds.

Target-date funds, frequently described as a “set it and forget it” approach to investing for retirement, have grown exponentially during the past decade. They are marketed as safe and conservative investment products. These funds are supposed to make it easier for investors who do not want to choose among options in their 401(k) plan, but want to rely on one option that is designed to be allocated to safer investments as an investor reaches his or her retirement date. These funds have grown as a result of a 2006 change in the law that authorized employers to automatically enroll employees in 401(k) plans, which allowed target-date funds to serve as the default option.

A recent report states that as of December 31, 2010, target-date mutual fund assets totaled $340 billion, a 33% increase from December 31, 2009.29 Retirement accounts held the bulk of target-date mutual fund assets — 91% of target-date mutual fund assets were held through direct contribution plans and IRAs.30 It is estimated that target-date funds currently hold $400 billion in assets, and will grow to $2 trillion within a decade.31 Vanguard reported recently that 79% of the plans it administers offered target-date funds last year, up from 13% as recently as 2004. Likewise, 42% of Vanguard plan participants used target-date funds last year, up from just 2% in 2004.

Unfortunately, as a number of retirees have learned, target-date funds are not as safe as they seem. Many investors near retirement age suffered dramatics losses in the 2008 market crash with these investment products. For example, target-date funds, with dates between 2000 and 2010 lost 22.5% in 2008, and funds with target dates between 2011 and 2015 lost 28%.32 But, those are broad averages, some funds with dates as early as 2010 lost as much as 50% of their value in 2008.33

However, it is understandable why investors continue to invest in these types of investment products. Target-date funds have an attractive quality. These are funds that seem to meet the desires of older investors. These types of investors expect their assets to be allocated more conservatively, as they approach retirement.

Investor’s misperceptions about target-date funds arise, in part, on the representations made in marketing campaigns. Many investors have been sold on the idea that choosing a target-date fund based on the investor’s retirement date is the only criteria required — that these are “simple” investment products. Unfortunately, that’s not the case.

Marketing campaigns, by and large, failed to inform investors about the structure of these funds, and that target-date funds, like any other investment product, can lose significant amounts of money. No investment product is risk free. It is important that no investment product be sold as such. It is incumbent on the Commission to ensure that investors who purchase target-date funds know what they are buying, and appreciate the risk and costs associated with those products.

It is very important for the Commission and the industry to equip investors with the information and tools to be able to truly evaluate these products and be in a position to make an informed decision.

Last year, the SEC proposed rules that would address the concerns regarding the potential for investor misunderstanding stemming from target-date fund names and marketing materials. The Commission’s proposal would have required 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 immediately adjacent to the fund’s name, the first time the fund’s name is used. In addition, 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. SEC staff is currently involved in investor testing to see whether the proposed rule will have the intended effects of providing clarity in disclosure and advertising.

Despite the proposed rule, most target-date funds still have a great deal of equity exposure and are subject to significant risk for participants near or at retirement. It has been found that some target-date funds have equity allocations ranging as high as 65% at the traditional retirement date, corresponding to age 65.34 Today, one might think that after financial crisis, target-date fund managers would cut back on holding equities so close to maturity. The percentage of stocks that target-date funds hold at their target date, however, rose to an average of 43% in 2010 from 40% in 2007.35

I can only imagine the unpleasant surprise that would be experienced by someone who planned to retire in 2010, and had invested in a target-date fund for that year. On average, target-date funds set to mature that year declined 37% between the market peak in October 2007 and March 2009.36

Today, it is still very difficult for investors to figure out a fund’s philosophy by looking at the fund documents. Even experts have complained that the data is too hard to find.37 If experts find locating useful information challenging, what chance does the average investor have?

I am also concerned by reports that, not only are risks not clearly disclosed, but neither are the fees. Critics have charged that, due to the fund-of-funds construction, target-date funds often charge fees for the underlying funds, as well as an overlay management fee. How many investors understand this?

This can result in target-date funds having higher fees, as compared to the fees charged by choosing three or four individual funds that would result in the same asset allocation. Moreover, target-date funds are often assembled from in-house, proprietary underlying funds run by the record-keeping companies hired by plan sponsors. Critics point out that no one company will have best in class funds in every asset class.38 Thus, investors may be investing in funds that have diluted performance from the blend of the return between the proprietary funds and layering on the fees. I don’t believe that currently investors have all the tools they need to be able to parse these products.

I believe that the SEC should immediately adopt measures to provide the tools to help investors in target-date funds make informed decisions.

Investors require not just any disclosure, but high-quality disclosure that equips them to evaluate the fee, structure and risks of the products they invest in. It is the Commission’s mandate and responsibility to equip investors with the tools they need to evaluate investment products.


As I end my remarks, I want to say that, given the importance of retirement outcomes for all investors, the Commission simply must ensure that investors have the information and the tools they need to invest wisely. Transparent and real-time disclosures are essential tools for investors to improve retirement outcomes.

Investors in the marketplace are vulnerable to bad actors and information, and power asymmetries. The SEC must act on its role as the investors’ advocate to ensure that investors are well-served and able to progress towards a fruitful retirement.

I commend the efforts of the American Retirement Initiative. Your efforts are sorely needed, and our nation needs you to be successful. I stand ready to help any way I can.

Thank you for having me here today.

1 National Endowment for Financial Education, “Survey: Redefining the American Dream” (August 22, 2011), http://www.nefe.org/NEFENews/PressRoom/

2 Investment Company Institute, “Enduring Confidence in the 401(k) System, U.S. Retirement Assets,” (January 2010), available at http://www.ici.org/pdf/ppr_10_ret_saving.pdf.

3 Blake Ellis, “Investors $500 Billion Slip Away In One Day,” CNN Money (September 22, 2011), available at http://money.cnn.com/2011/09/22/markets/stock_market_loss/index.htm.

4 “Economic Volatility Raises Doubts over Retirement and College Savings” Allianz Life Insurance Company of North America (October 10, 2011), available at https://www.allianzlife.com/MediaCenter/News.aspx.

5 Stephen Blakely, “Is There a Future for Retirement?” Employee Benefit Research Institute, (September 2011), available at http://www.ebri.org/pdf/PR937.07Sept11.Ret-Future.pdf.

6 Id.

7 Id.

8 AARP June 23, 2011 letter Re: File Number 4-626, http://www.sec.gov/comments/4-626/4626-71.pdf.

9 William G. Gale and Ruth Levine, “Financial Literacy: What Works? How Could It Be More Effective?” The Brookings Institution (October 2010), available at http://www.brookings.edu/papers/2010/10_financial_literacy_gale_levine.aspx.

10 Id.

11 See The Washington Post/Kaiser Family Foundation/Harvard University Race and Recession Survey (February 2011), available at http://www.kff.org/kaiserpolls/upload/8159-T.pdf.

12 FDIC National Survey of Unbanked and Underbanked Households (February 2009), available at http://www.fdic.gov/householdsurvey/full_report.pdf.

13 James M. Poterba, Steven F. Venti and David A. Wise, “The Transition to Personal Accounts and Increasing Retirement Wealth: Macro and Micro Evidence” National Bureau of Economic Research (November 2001), available at http://www.nber.org/papers/w8610.pdf.

14 Bureau of Labor Statistics, U.S. Department of Labor, “Employee Benefits in the United States” (March 2011) available at http://www.bls.gov/ncs/ebs/sp/ebnr0017.pdf.

15 See Investor Alert: Self-Directed IRAs and the Risk of Fraud (September 26, 2011), http://www.sec.gov/investor/alerts/sdira.pdf.

16 Id.

17 See, e.g., SEC v. United American Ventures (July 10, 2006), http://www.sec.gov/litigation/complaints/2010/comp21556.pdf; and SEC v. Stinson (June 29, 2010), http://www.sec.gov/litigation/complaints/2010/comp21584.pdf.

19 Id.


21 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. 111-203 (2010).

[22] Mandatory Disclosure Documents Telephone Survey, July 30, 2008, http://www.sec.gov/pdf/disclosuredocs.pdf.

[23] Id.

24 SEC Plain English Handbook, March 30, 1999, http://www.sec.gov/news/extra/handbook.htm.

25 Id.

26 SEC Launches Investor.gov, October 22, 2009, http://www.sec.gov/news/press/2009/2009-224.htm.

27 Sec. 917 of The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. Law 111-203-July 21, 2010.

28 See Testimony Concerning Financial Literacy: Empowering Americans to Make Informed Financial Decisions, by Lori Schock, Director, Office of Investor Education and Advocacy, U.S. Securities and Exchange Commission, Before the Subcommittee on Oversight of Government Management, the Federal Workforce, and the District of Columbia of the Senate Committee on Homeland Security and Governmental Affairs (April 12, 2011), available at http://www.sec.gov/news/testimony/2011/ts041211ljs.htm.

29 Investment Company Institute “Retirement Assets Total $17.5 Trillion in Fourth Quarter 2010” (April 13, 2011), http://www.ici.org/pressroom/news/ret_10_q4.

30 Id.

31 Brightscope “The Real Facts about Target Date Funds” (October 2011), available at http://www.brightscope.com/media/docs/whitepapers/BrightScope-Real-Facts-about-Target-Date-Funds.pdf.

32Morningstar “Target-Date Series Research Paper: 2009 Industry Survey” (September 9, 2009), available at http://www.ibbotson.com/us/documents/MethodologyDocuments/

33 Id.

34 Robert Steyer, “Target date funds to heavy in equities for retirees” Pension and Investments (June 28, 2011), available at http://www.pionline.com/article/20110628/DAILYREG/110629906/.

35 Supra note 31.

36 Supra note 32.

37 Supra note 31.

38 “Retirement: The trouble with target date funds” Reuters Money by Mark Miller (March 30, 2011), available at http://blogs.reuters.com//reuters-money/2011/03/30/retirement-the-trouble-with-target-date-funds/.



Modified: 07/09/2014