Corporate & Securities Law

Target Date Funds Face New Regulatory Scrutiny

By Tom Hargett

Popular retirement-plan products known as target date funds are facing regulatory scrutiny from both the Securities and Commission (SEC) and the Department of Labor. The criticism comes after target date funds, which entail a combination of stocks, bonds and other investments and are designed for people nearing retirement, suffered massive losses following the market collapse of 2008. Even some of the most conservative target date funds have lost 30% to 40% of their value.

Critics of target date funds contend too many investors simply have the wrong perception of the products. A survey conducted by the research firm Behavioral Research Associates LLC last March showed that 61% of respondents thought target date funds made some type of ?promise.? Other investors said target date funds meant a ?secure investment with minimal risk,? while some stated that target date funds provided a ?guaranteed return.?

All three assumptions are incorrect. Target date funds typically invest in other funds, making them subject to those underlying holdings and, at the same time, the potential for volatility and risk.

Moreover, there is no one-size-fits-all approach to target date funds. The mix of stocks, bonds and other securities varies from fund to fund. That means two funds with the same target date could easily have a vastly different underlying mix of holdings. A Feb. 27, 2009, article by SmartMoney illustrates this point. Oppenheimer?s 2010 fund (OTTAX) had 65% in stocks and lost 41% in 2008. By comparison, the NestEgg 2010 portfolio (NECPX) had about 32% in stocks and lost less than 10%.

Another issue for regulators concerns the costs of target date funds. According to Morningstar, more than half of target date funds have an annual management fee of 1% or more. By the time someone retires, that 1 percentage point in fees will add up, reducing an investor?s total accumulation by up to 20%.

A March 7, 2010, article in Investment News reports that the SEC and the Labor Department plan to issue a joint consumer alert on the use of target date funds in retirement plans.

Full post as published by Representing Investors on March 08, 2010 (boomark / email).