Corporate & Securities Law

SEC's Mary Schapiro Finds Target Date Funds' Returns Troubling And Outlines SEC's Response To The Problem

By James Eccleston

Recently, SEC Chairman Mary Schapiro addressed the Mutual Fund Directors Forum Ninth Annual Policy Conference. 

Ms. Schapiro commented that investor confidence has been deeply shaken, and that restoration of investor confidence is an essential element to moving the nation's economy forward.  She outlined several steps that the SEC is taking to help restore investors' confidence.

Among those steps concerned what the SEC is doing with respect to target date funds.  She said:

Another area the SEC is examining for the benefit of fund investors is target date funds.  As you are aware, target date funds generally invest in a mix of equities, fixed income securities and other instruments.  The proportionate percentages of these asset classes change over time, so that as a fund approaches its "target" date, its asset allocations move toward a more conservative allocation.  The shift in allocation is often referred to as a fund's "glide path."

Target date funds have become quite popular.  Over the past three years, target-date fund assets have increased from $66 billion at the end of 2005 to $152 billion in March, after peaking at $178 billion in 2007.  Growth in target date fund assets is likely to continue since these funds can be default investments in 401(k) retirement plans under the Pension Protection Act of 2006.  More than 60 percent of employers now use target date funds as a default contribution option, compared with just 5 percent in 2005.

However, target date funds have produced some troubling investment results.  The average loss in 2008 among 31 funds with a 2010 retirement date was almost 25 percent.  In addition, varying strategies among these funds produced widely varying results.  Returns of 2010 target date funds ranged from minus 3.6% to minus 41 percent.

One explanation put forward for these outcomes is that many target date funds underlying retirement plans actually establish their "glide paths" based on the assumption that investors will continue to maintain their investments, and partially live off the proceeds, for a number of years following retirement.  If that is the case, it must be plainly disclosed to investors.  A target date fund underlying a college investment or so-called 529 plan, on the other hand, would need to more closely track its target date since it is far more likely that investors would need access to their investment at or near the fund's target date.

I can assure you that SEC staff is closely reviewing target date funds' disclosure about their glide paths and asset allocations.  The staff also is examining whether the same target date funds underlie both retirement and college savings plans.  The staff has been working closely with the Department of Labor in light of target date funds' prevalence in participant-directed retirement plans.  This important issue has also been an area of focus for Chairman Kohl and the Senate Special Committee on Aging.

I challenge those of you who are directors of target date funds to carefully review your funds' asset allocations and investments.  Consider, in particular, whether your target date funds' asset allocations and investments are consistent with investor expectations.  Are they consistent with your own expectations of how a fund with a "target date" of 2010, 2015, or 2020 should invest?

While you do your part, we at the SEC will do ours.  We will consider whether additional measures are needed to better align target date funds' glide paths and asset allocations with investor expectations.  Among other issues, we will consider whether the use of a particular target date in a fund's name may be misleading or confusing to investors and whether there are additional controls the SEC should impose to govern the use of a target date in a fund's name.  As we pursue this analysis, we will have a special focus on the expectations of the millions of everyday Americans who use target date funds to invest for retirement and educational needs.

Source:  SEC - Speech: Conference Address on Critical Issues for Investment Company Directors

Full post as published by FinancialCounsel on May 08, 2009 (boomark / email).