It sounded so straightforward. Give defined contribution (DC) plan participants an investment option with an asset allocation strategy tied to the participant’s anticipated retirement date. In other words, a diversification one-stop shop with no plan participant rebalancing needed.
But everything did not work out as anticipated. The asset allocation, and investment risk, of funds with the same target date varied dramatically, a point driven home during the equity market downturn. Funds with the same target date often experienced dramatically different losses.
To make these differences clearer, the U.S. Securities and Exchange Commission’s (SEC) has proposed rule amendments for target date funds that would directly affect the disclosures and information provided defined contribution plan participants and other fund investors.
The SEC proposals, announced in June, seek to help investors better assess the anticipated investment glidepath and risk profile of a target date fund. Specifically, the four proposed amendments would require:
- Marketing materials for a target date fund that includes the target date in its name to disclose the asset allocation of the fund among types of investments. The types of investments – such as equity securities, fixed income securities, or cash – would need to appear with the funds name the first time the fund’s name is used.
- Print and electronic marketing materials to include a prominent table, chart or graph clearly depicting the asset allocations among types of investments over the entire life of the fund. The table, chart or graph also must be immediately preceded by a statement explaining:
- The asset allocation changes over time
- The asset allocation eventually becomes final and stops changing
- The number of years after the target date at which the asset allocation becomes final
- The final asset allocation.
- Target date marketing materials to include a statement informing the investor:
- To consider the investor’s risk tolerance, personal circumstances and complete financial situation.
- That an investment in the fund is not guaranteed and that it is possible to lose money by investing in the fund, including at and after the target date.
- Whether, and the extent to which, the intended percentage allocations of a target date fund among types of investments may be modified without a shareholder vote.
- Antifraud guidance to note that a statement in marketing materials suggesting that securities of an investment company are an appropriate investment could be misleading because of:
- The emphasis it places on a single factor, such as age or tax bracket, as the basis for determining that an investment is appropriate.
- Representations that investing in the securities is a simple investment plan or requires little or no monitoring.
In response to these proposals the Defined Contribution Institutional Investment Association (DCIIA) submitted commentary to the SEC. As a member of the DCIIA, Northern Trust shares the association’s views on the proposals, including:
- The naming convention of target date funds must be straightforward and intuitive.
- Care should be taken in defining risk â€“ higher equity allocations are not the only determinative of risk.
- Inconsistent regulation can result in poor outcomes. The proposed rules should, when applied to target date funds offered by DC plans, take into account existing Department of Labor regulations and initiatives to increase retirement savings, and support the offering of target date funds in DC plans as default investment options.
- Target date fund marketing materials should not only be clear and understandable, but should not overcomplicate the investment process or overwhelm investors and inappropriately thwart the effort to increase American workerâ€™s retirement savings.
- Target date fund marketing materials should be tailored to the target audience (retail investor vs. DC plan fiduciary vs. DC plan participant) and in light of the audience to whom communication is directed.
The SEC proposals cover target date mutual funds, which are governed by the Investment Company Act of 1940. Some sponsors of funds implemented through collective investment trusts, however, also have incorporated recommended enhancements from the mutual fund industry to maintain a “best practices” approach.
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