Speech by SEC Commissioner:
Statement at Open Meeting to Propose Amendments Regarding Target Date Retirement Fund Names and Marketing
Commissioner Troy A. Paredes
U.S. Securities and Exchange Commission
June 16, 2010
Thank you, Chairman Schapiro.
I support the recommendation before us today and look forward to the comments we will receive.
Among other things, the proposal provides that if a target date fund's name includes the target date, the fund's asset allocation at the target date must be disclosed immediately adjacent to the first use of the fund's name in fund marketing materials. The fund's asset allocation at the target date must be disclosed so as to draw investor attention to the information.
This asset allocation disclosure is designed to address a particular concern: That the target date in a fund's name may foster investor confusion and misunderstanding. For example, an investor who focuses on the target date identified in a fund's name may not appreciate that the fund follows a glide path between the target date and the fund's landing date. Relatedly, an investor may not realize the degree of investment risk he or she continues to bear into retirement after the target date passes or that different target date funds may have different asset allocations at their respective target dates and later.
A disclosure that prominently features the asset allocation at a fund's target date next to the fund's name may serve to deemphasize the target date itself by providing investors with additional information that captures their attention. Further, the asset allocation disclosure may alert investors that they should examine still more information, beyond the target date asset allocation, to ensure that they properly understand the fund, including how the fund's portfolio may change over time. As the release elaborates, "[The asset allocation disclosure] may help counterbalance any misimpression that a fund is necessarily conservatively managed at the target date or thereafter or that all funds with the same target date are similarly managed."
Against this backdrop, I want to single out one topic that I hope commenters will address — namely, might investors end up placing undue emphasis on a fund's asset allocation at the target date, precisely because this information is prominently disclosed, at the expense of other relevant disclosures? The concern that investors have been confused and have misunderstood target date funds rests, in part, on the view that investors have unduly emphasized the date in a fund's name without adequately engaging other important information about the fund. The proposed asset allocation disclosure is expected to diminish the impact of the target date as such on investor behavior by drawing investor attention away from the date. But as investor focus shifts to the new disclosure, a fund's asset allocation at the target date may itself become unduly salient information that disproportionately influences investors as compared to other significant information that is presented less noticeably in marketing materials. Should this be a concern? If so, how might the asset allocation disclosure requirement be refined to address the concern? And how might target date fund managers change their own behavior if investors were to unduly emphasize a fund's asset allocation at the target date?
Let me conclude by joining my colleagues in thanking the many members of the staff — particularly those from the Division of Investment Management and the Division of Risk, Strategy, and Financial Innovation — for your hard work on this proposal. I appreciate your dedication and your efforts.