Target-Date Fund Rule Revisions Urged by SEC Advisory Committee

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Photographer: Chip Somodevilla/Getty Images

The U.S. Securities and Exchange Commission seal hangs on the facade of its building in Washington, DC.

The U.S. Securities and Exchange Commission’s Investor Advisory Committee adopted recommendations today asking the agency to rewrite its proposed rule on target-date retirement funds.

The recommendations adopted by the committee at a meeting in Washington would expand a 2010 SEC proposal by requiring increased disclosures to investors in the funds about their fees and risks.

“In making this change in disclosure, we are actually going to teach investors something really important that most of them don’t understand,” said James Glassman, a committee member and founding executive director of the George W. Bush Institute, said at the hearing. “There is more to risk than asset allocation.”

Target-date funds, the most common default option for employees joining 401(k) plans, hold a mix of assets that shift from riskier investments such as stocks to more conservative ones like bonds as workers near retirement age. Assets in the investments will more than double to $1.1 trillion by 2017, according to estimates by the Boston-based research firm Cerulli Associates.

The funds’ fees, disclosure and risk structure have come under scrutiny by regulators and legislators after some lost as much as 41 percent in 2008, according to Morningstar Inc (MORN). That compared with a 38 percent drop in the Standard & Poor’s 500 Index.

“The risks were not well understood by fund participants,” said Barbara Roper, an advisory committee member and director of investor protection at the Washington- based Consumer Federation of America.

2010 Proposal

The SEC proposed in 2010 that target-date funds disclose their asset allocation at the projected retirement date “immediately adjacent to” the first use of the fund’s name in marketing materials. The proposal also would require more disclosure about a fund’s investment mix and so-called glide path, which determines when and how quickly it shifts from stocks to bonds.

The Investor Advisory Committee made five recommendations to revise and expand the SEC’s original proposal. They would develop a glide path illustration for target-date funds based on risk rather than asset allocation alone, require fund prospectuses to disclose how they manage their risks and amend fee disclosure requirements to show the impact of those costs over the lifetime of the investment.

‘Small Differences’

“This is an investment that by its nature is sold as something that the investor may hold over decades and sold to an unsophisticated investor,” Roper said. Many investors don’t understand how small differences in fees may affect their returns over time, she said.

Fidelity Investments, T. Rowe Price (TROW) Group Inc., Vanguard Group Inc. and BlackRock Inc (BLK). are among the largest providers of target-date funds, according to Cerulli.

“Default investing scares the heck out of me,” SEC Commissioner Daniel Gallagher said at the hearing. “The assets just balloon in size and the numbers are just staggering.”

Gallagher said he supports the committee’s recommendations on target-date funds.

“It’s a burgeoning industry and one we really have to get ahead on,” he said.

To contact the reporters on this story: Margaret Collins in New York at mcollins45@bloomberg.net; Dave Michaels in Washington at dmichaels5@bloomberg.net

To contact the editors responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net; Maura Reynolds at mreynolds34@bloomberg.net

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