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.

The target date fund market shows explosive growth, with over $250 billion in assets

Morningstar has noticed an explosive growth in the target date fund market. Despite some negative attention from Capitol Hill and the financial media, it is clear that investors are comfortable with using target date funds as a retirement investment vehicle. At the end of 2009, the 15 largest fund companies had over $255 billion in assets in target date funds. With such rapid growth, participants will benefit from accurate personalized projections that properly account for a target date fund glide path.

“Net assets in target-date mutual funds at the 15 largest fund companies have grown to nearly $256.5 billion at the end of 2009, according to statistics published by Morningstar.”

Read more about Morningstar’s research »
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Make sure your retirement planning tool is telling the truth.

It’s clear that target date funds are the leading default investment option for the defined contribution industry. Research from Vanguard shows tremendous growth in the TDF market. Participants who are automatically placed in TDFs should consider the tools and services they are offered to help them accurately plan for retirement.

We believe that every participant deserves to know how a TDF may impact their retirement goals. Not a single fund provider gives participants personalized retirement projections that consider a TDF glide path. This is a very big problem.

For example, a 25 year old participant may be placed in his provider’s 2050 TDF. This fund is sold with an ‘invest and leave it’ label, and he is assured that as he ages, his investment will be managed appropriately and properly contributed to.

To plan for retirement, he can enter his information into his provider’s retirement planning tool. When required to select a between a conservative, moderate and aggressive investment strategy, he decides that aggressive is the appropriate choice for a 25 year old.

Proposed regulations raise concern over active management in 401(k) advice. What does that imply for TDFs?

The new advice rules for 401(k) plans are creating quite a stir in the industry. One columnist shares his observations in a piece from CBS Moneywatch.

“The proposal, in part, concerns the delivery of advice to 401(k) participants. Worried that the advice might be slanted in favor of asset managers, the Department of Labor will require that the recommendations be provided by unbiased computer models. But the questions the Department is asking as it establishes the basis for those computer models have many in the brokerage industry up in arms. The questions, they fear, indicate that the guidelines for 401(k) advice will favor — if not exclusively require — the use of index funds.”

This brings a question to my mind: should target date funds only consist of passive funds as well?

Vanguard sees rapid growth in target date fund adoption. Are participants prepared?

Vanguard recently released research highlighting the rapid growth in the adoption of target date funds in plans.

“The percentage of Vanguard defined contribution (DC) plans offering target-date funds increased from 13% of plans in 2004 to 75% in 2009. Target-date funds are rapidly replacing risk-based life-cycle funds in plan investment menus and are the predominant choice for plans offering a qualified default investment alternative (QDIA). As this increased use reshapes investment patterns, a new research note from Vanguard Center for Retirement Research explores what this trend can mean for plans and participants.”

View the PDF, Target Date Fund Adoption in 2009

This research analyzed 3.2 million participants in 2,200 defined contribution plans administered by Vanguard.