Are the SEC's new TDF regulations enough?

The SEC has just announced new disclosure requirements for target date funds.

The SEC’s proposal would require marketing materials that are in print or delivered electronically to include a prominent table, chart, or graph that clearly depicts the asset allocations among types of investments over the entire life of the fund. These proposals would also require that the table, chart, or graph be immediately preceded by a statement explaining that the asset allocation changes over time, noting that the asset allocation eventually becomes final and stops changing, stating the number of years after the target date at which the asset allocation becomes final, and providing the final asset allocation.

This type of transparency is a logical first step, but it is not enough to inform and protect investors. Managers design target date funds to hold all of an investor’s assets for years, if not decades.

There should be some accountability for tracking asset allocations and other strategy changes over time. I’m not referring to the projected change in asset allocation over time, which is outlined as a requirement in the SEC statement. Rather, I’m referring to significant strategy changes from year to year that impact both the current and future allocations. This is discussed in a previous post, but is well worth referencing in light of the SEC’s decision.

In recent years, some major fund managers have added whole new sets of asset classes to their target date fund glide paths. Funds offered by Principal, Fidelity and T. Rowe now include allocations to TIPs, REITs, Commodities and Natural Resources.

In order to follow the SEC’s guidelines, such a change would require the fund managers to publish their updated asset allocations, and explain how that new allocation will change over time.

However, they aren’t explicitly required to explain how or why a major change occurs. It would be easy for an investor to overlook such details.

It should be easy for fund managers to provide this comparison and explain why they changed their allocation strategy. It would be interesting to know whether these fund managers clearly communicated the changes to their investors.

In conclusion, the SEC gets an incomplete grade. While they do require fund families to explain their current and final allocations, they don’t require fund managers to document significant changes to their methodology over time. The investor that holds TDFs as intended, year in and year out, needs to know what has changed about their investment. Each year the disclosure should be updated and material changes to the asset allocation, or any aspect of the fund management, should be clearly highlighted for investors.