BOSTON (TheStreet) -- In the aftermath of the financial meltdown of 2008, Target Date Funds were lambasted for having higher risk profiles than retiring investors should have anticipated.
A call for comments by the
Securities and Exchange Commission
on proposed regulatory changes netted fewer than
, though, while a similarly timed public comment period on fiduciary standard revisions drew roughly 2,500 letters and e-mails. (The review, which began in mid-July, was even extended. It initially had an Aug. 23 deadline, but comments were accepted and posted as late as Wednesday.)
The exchanges on TDFs, also known as Life Cycle Funds, were mainly by experts in the field. But they were biting.
TDFs have become a $270 billion marketplace, growing more prevalent in 401(k) plans because the
Department of Labor
has designated them as qualified default investment alternatives. Employers are therefore 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 SEC is proposing that TDF marketing materials, whether in print or delivered electronically, include a prominent table, chart or graph that depicts clearly asset allocations among types of investments over the entire life of the fund. There would also be the requirement of a statement explaining the number of years after the target date at which the asset allocation becomes final, and providing that final asset allocation.
The SEC suggests that funds include a tagline next to their name that would say, for example, "40% equity, 50% fixed income, 10% cash in 2020."
Among the most strongly worded critiques came from Ryan Alfred, president of
, an independent provider of 401(k) ratings and analysis, and Joe Nagengast, principal of
, which provides analysis and benchmarking of TDFs.
Although agreeing in concept with the SEC's desire for greater accuracy and transparency, they said the proposals don't go far enough and are "insufficient to fully protect investors."
"Retirement plan investors -- who account for roughly two-thirds (and growing) of all target date assets -- are the least likely candidates to evaluate additional graphs and charts before making a decision to invest in a mutual fund," they wrote.
Among their proposals are requiring that the date in the name of the fund indicate the fund's landing point -- the date the fund reaches its most conservative asset mix.
The SEC could also propose names that account for ranges of equity allocations that correspond to the riskiness at the target date. A zero-to-20% equity allocation at the landing point, for example, could be labeled "conservative," a 20-40% allocation as "moderate" and 40%-plus as "aggressive."
"If an investor retiring in 20 years wants a fund that reaches its most conservative point at their retirement date and wants to make sure their principal is secure at that point, she can buy a '2030 Conservative' Fund," they wrote. "If a different investor wants to remain invested until their expected mortality, and is comfortable taking on more stock risk, he can buy a '2055 Aggressive' fund. This naming scheme is simple, describes the fund, but does not prevent fund managers from creating whatever strategy they deem most effective."
Comments by F. William McNabb III, chairman and CEO of The Vanguard Group, defended TDFs as providing broader diversification and more balanced portfolios than many investors might otherwise construct on their own."
"At the end of last year, 39% of defined-contribution retirement plan participants who did not hold TDFs had either zero or 100% of their retirement plan balances invested in stocks," he wrote. "By comparison, no TDF investor had a zero or 100% allocation to stocks."
"The 2008 declines led some critics to question the construction of TDFs, particularly their exposure to equities for investors closest to retirement," he added. "An inordinate amount of focus has been placed on a single year's performance and predominantly on 2010 TDFs, particularly one outlier fund with a return of negative 40% when the average decline of TDFs was 24% in 2008. By comparison, similar funds suffered even greater declines. The average balanced fund declined nearly 27% in 2008, and the average flexible portfolio fund dropped 28.5%, although such funds did not draw the attention of the media."
"We are concerned that the commission's proposal to add asset allocation information to the name of the fund will confuse rather than assist investors," wrote Chip Castille, managing director head of U.S. defined contribution for
. "As currently proposed, the funds would be required to indicate a shorthand asset allocation as of the target year. Unfortunately, we believe many investors will mistake this for current allocations or will simply not understand the shorthand. In addition, this shorthand is not sufficient to describe the risks of various asset classes or sub-asset classes. For example, an actively managed international small-cap fund would be considered an 'equity' fund, as would a U.S. large-cap index fund, yet these two funds would have very different risk profiles."
Brian Graff, executive director and CEO of the
American Society of Pension Professionals & Actuaries
said the SEC should address the potential impact if there is a sizable difference of age between spouses.
"A TDF for a participant who intends to retire at age 70 (with a life expectancy of 16 years) and his spouse is age 68 (with a life expectancy of 22 years) may not be appropriate for a 70-year-old with a 55-year-old spouse (whose life expectancy may be 35 years)," he wrote.
--Written by Joe Mont in Boston.
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