Bailout

Mutual fund datapoint of the day

By Felix Salmon

Leslie Wayne reports:

As the stock market plummeted last year, some 2010 funds ? which many investors thought would be invested safely by then to protect their nest eggs ? lost 40 percent of their value. That showing was even worse than that of the Standard & Poor?s 500, which fell 38.5 percent.

Clearly, these target-date funds — which are likely to become much more popular if and when the Obama administration enacts opt-out rules for 401(k) contributions — could do with a bit of regulation: many of them seem to be designed to maximize fund-management fees, through a fund-of-funds structure, while doing very little to actually reduce risk as the target date approaches.

But who’s going to regulate these funds? They seem to lie outside the narrow remit of the Consumer Financial Protection Agency; while they might be looked at by the Financial Consumer Coordinating Council, which is a committee including the CFPA, it’s unclear whether the FCCC will have any teeth at all.

I hope that Wayne continues to report this story, and asks giants like Fidelity and AllianceBernstein why their 2010 funds were 50% and 57% in stocks, respectively, over the course of 2008. But for real regulation of these beasts, I think the SEC is our only hope. The good news is that Schapiro is on the case. The bad news is that she’s asking “whether it is necessary to improve SEC regulations to address any deficiencies with respect to target date funds”. In other words, she doesn’t have the requisite teeth yet, and it’s unclear whether Congress is minded to give her those powers.

Update: ajw, in the comments, finds one official rationale for keeping target-date funds overinvested in equities: that the idea is for the investors in these funds to hold on to the funds even after they have retired, rather than selling them for cash or converting them into an annuity or something like that. So retirement could, on this view, be decades before you actually need the funds. As ajw notes, this is self-serving and unconvincing.

Full post as published by Macroprudential on June 25, 2009 (boomark / email).