SEC Proposes Target-Date Funds Disclose More Risks
June 16, 2010
The Securities and Exchange Commission on Wednesday proposed that sponsors of target-date retirement funds clearly explain the risks involved with their purchase and how they are allocating their monies.
Target-date funds, an estimated $270 billion market, are a popular way to invest in 401(k) plans. They are pegged to a person’s expected retirement year and allocate investments among different types of asset classes. Their contents typically switch from stocks, which fluctuate in value, to fixed-income securities with predictable streams of interest closer to the date when retirees want to liquidate their accounts.
The SEC wants the target-date funds to include in either their print or electronic marketing materials some type of graphic showing the allocations among the various asset classes over the life of the fund. The funds would also have to include a statement explaining that the asset allocations change over time and that it is possible to lose money investing in the fund. The new rules could be in effect as early as 60 days after they appear in the Federal Register.
Target-date funds rose in popularity for plan sponsors after the Pension Protection Act of 2006 defined them as “Qualified Default Investment Alternatives” (QDIAs). That meant that sponsors of the funds – aka the corporate employer – couldn’t be sued when it invested a worker’s contribution in a target-date fund if the employee didn’t make another investment choice.
But target-date funds drew plenty of criticism during the financial crisis when many experienced some significant losses. Some funds had invested in “junk bonds” while others had more aggressive asset allocation “glide paths” leaving near-retirement investors exposed to higher levels of stock.
While target-date funds have recovered most of their losses since 2008, returns vary widely, says the SEC, citing figures of between 7 percent and 31 percent The average return on a target date fund was about 22 percent last year.
