SEC, Labor May Issue Consumer Alert on Target-Date Funds
March 16, 2010
The Securities and Exchange Commission and the Department of Labor are expected to soon issue a joint consumer alert on how pension plan participants should use target-date funds for their retirement, said two executives in the target-date funds market.
The alert will include just what plan participants need to know about how target date funds work and their investment safety.
John Heine, a spokesman for the SEC declined to comment as did Gloria Della, a spokeswoman for the Department of Labor..
Target-date funds have been marketed as safe vehicles for employees to prepare for their retirement because their allocation mix – aka their glide path – was supposed to shift from being heavily concentrated on equities to high-quality bonds as an investor approaches retirement.
However, such is not always the case, as evidenced by huge losses experienced the financial crisis. Many of the funds were still heavily invested in either stocks or “junk bonds” at the time they expired – when the retirees were supposed to cash out their investment.
The SEC has previously said it wants to issue new guidelines for how target date funds could improve the disclosure of their investment risks.
At a speech during the Investment Company Institute’s mutual funds and investment management conference in Phoenix on Tuesday, Luis Aguilar, a commissioner with the SEC, said that investors were taken aback by the poor performance of target-date funds because they didn’t understand what they were buying. He called the language used to describe how target-date funds operate as “vague and confusing.”
In December, Assistant Labor Secretary Phyllis Borzi promised that the DoL would issue guidance on how plan sponsors should use target date funds as part of their pension plan offerings. But the DoL subsequently countered such an idea saying it didn’t view target date funds as “plan assets.”
That meant that the DoL would not seek rule changes to require advisers of the funds would not fall subject to the requirements of the Employee Retirement Income Security Act (ERISA) of 1974 to act as fiduciaries.
Such a decision doesn’t prevent Congress from taking action. The Senate Special Committee on Aging is separately promoting legislation requiring target date fund managers to act as fiduciaries under ERISA, which could take effect as early as April.
The DOL is now considering how to regulate the disclosure which managers of target date funds provide participants in the funds.
