Corporate & Securities Law

The Securities and Exchange Commission has voted unanimously to propose rule amendments to help clarify the meaning of a date in a target date fund's name and enhance the information provided to investors in these funds as they invest for retirement.

Target date funds are designed to make it easier for Americans to invest for retirement by providing the simplicity for which many investors yearn.  They've been marketed as a "set it and forget it" approach to investing. 

The rule changes proposed by the SEC would enable investors to better assess the anticipated investment glide path and risk profile of a target date fund by, for example, requiring graphic depictions of asset allocations in fund advertisements.  The rules also would require an asset allocation "tag line" adjacent to a target date fund's name in an advertisement.

The name of a target date fund often includes a date that reflects the year an investor plans to retire.  For example, funds with names like "Portfolio 2030" or "Retirement Fund 2030" are designed for individuals who intend to retire in or near the year 2030.

But, just because target date funds share the same target date does not mean they share similar investment strategies and risks.  In fact, the name does not guarantee that a person will have sufficient retirement income at the target date, or that an investor will not lose money.

The financial crisis of 2008 highlighted the volatility and variability even among funds that shared the same target dates.  For instance, funds with a target date of 2010 averaged nearly 24 percent in losses in 2008.  And, the losses for 2010 funds ranged between approximately 9 and 41 percent.  In 2009, the returns continued to vary widely for 2010 target date funds, ranging between approximately 7 percent and 31 percent, with an average return of approximately 22 percent.

Target date funds vary greatly from fund provider to fund provider in overall investment philosophy, underlying assumptions, glide path and what constitutes an appropriate portfolio for a given participant's anticipated retirement age.  The fiduciary responsibility of plan sponsors for selecting and monitoring target date funds is the same as that applicable to the selection and monitoring of any other plan investments under ERISA.

Last month, as a first step to address potential investor misunderstanding of target date funds, the SEC issued an Investor Bulletin jointly with the Department of Labor explaining target date funds and various aspects that an investor should consider before investing in one.

The SEC is seeking public comment on the rule amendments proposed for a period of 60 days following their publication in the Federal Register.

Sources: SEC Press Release 2010-103; DrinkerBiddle Employee Benefits & Executive Compensation Alert May 2010