Today, the Commission will consider proposed rules that would provide investors with enhanced information about target date retirement funds.
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 name of these funds usually includes a date that represents the year the investor intends to retire. Today's rules would help to clarify the meaning of the date in a target date fund and improve the information provided when these funds are advertised and marketed.
Among other things, the proposed rules 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 enhanced information will enable investors to better prepare for retirement.
Today's proposed rules are important when we consider the changing investment practices of Americans. Over the years, our nation has moved from a retirement funding system based on social security benefits and employer-sponsored defined benefit plans, to one that relies primarily on individuals to fund their own retirements. As such, the challenges faced by workers preparing for retirement have grown significantly. Many investors are understandably overwhelmed by multiple investment choices and increasingly complex investment products.
Target date funds allocate their investments among various asset classes. These funds automatically shift that allocation to more conservative investments as a "target" date approaches. This shifting allocation is frequently referred to as a fund's "glide path."
The target date typically is expected to correspond to an investor's anticipated retirement date. So, the target date often serves as a guide to investors when they select a target date fund.
In addition, as a result of the designation — by the Department of Labor — of target date funds as a permissible default investment option in 401(k) plans, many investors automatically are enrolled in target date funds.
Target date funds are designed for investors who do not routinely monitor market movements or realign personal investment allocations. However, the experience of 2008 revealed that target date funds did not perform as many retail investors expected.
For instance, funds with near-term target dates incurred substantial investment losses notwithstanding that some investors expected them to have conservative asset allocations in the years leading up to the target date. Imminent retirees invested in 2010 target date funds saw, on average, 24% of their funds' assets evaporate in 2008.
Many of these losses were attributed to target date funds' sizable allocation to equity investments. While the performance of these funds improved an average of 22% in 2009, the volatility experienced by 2010 target date funds surprised many. In the wake of the 2008 returns, many were surprised that funds with such near-term target dates were invested so heavily in the equity markets and lost such a sizable portion of their value.
In addition to losing substantial amounts of assets, the returns of 2008 revealed significant variability in the performance of target date funds with the same target date.
For example, for 2008, the returns of 2010 target date funds ranged from negative 9% to negative 41%. While the returns turned positive in 2009, the variability continued, with 2010 target date fund returns ranging from 7% to 31%.
Much of this variability in returns is the result of variations in asset allocations among target date funds with the same target date. Based on a staff review, equity exposure of target date funds at target date has ranged from 25% to 65%. This variability continued even beyond the target date. For example, a fund's landing point is the point at which the fund reaches its most conservative asset allocation and no longer adjusts its asset allocation. It can be at, or after, the target date. Again, our staff found significant variability among asset allocation at landing point, with equity allocations ranging from 20% to 65%.
Given the variability of returns of target date funds in 2008 — and again in 2009, it is clear that investors need more information than just the date in a fund's name. They need context in order to evaluate what the date means and what the fund's projected investment glide path is.
To consider these issues, the Commission and the Department of Labor held a joint Target Date Fund Hearing last year and requested public comment related to the use, construction, and performance of target date funds. In addition, earlier this year, our two agencies issued a joint Investor Bulletin alerting investors to the need to focus on more than just a date in a name when evaluating a target date fund. And following from what we learned at the joint hearing and in the public comment period, staff from across the SEC have been hard at work preparing the proposals under consideration today.
Given that investors in target date funds are, almost by definition, not active market observers or researchers, the best place to reach them is through marketing and advertising materials. Indeed, many 401(k) investors, particularly those who are automatically invested in target date funds, may not closely study a fund prospectus — even if it is provided to them — to understand the impact of glide path and asset allocation. In addition, because the date in a fund name, without additional context, may not give investors the information necessary to assess the impact of asset allocations, investors would benefit from additional information. As we saw, target date funds with
As a result, today we are considering rules that would require the following measures:
First, we are considering a proposal to require advertisements and marketing materials for target date funds that include a date in their name to also include the fund's expected asset allocation at the target date. The asset allocation would appear immediately adjacent to the fund's name. So, the XYZ 2020 Target Date Fund would include a tag line adjacent to its name that would say, hypothetically, "40% equity, 50% fixed income, 10% cash in 2020."
Such information would enable investors to assess the asset allocation variability among target date funds, and consider whether the asset allocation meets the investor's conservative, moderate, or aggressive expectations. The tag line gives investors more than just a date to go on when looking at a fund name in advertising and marketing materials. At the same time, the tag line next does not overwhelm an investor with complicated financial information.
Under the proposal, ranges such as "40-45% in equity" would be permitted in the tag line. I am particularly interested in public comment on whether such ranges are appropriate, or whether they should be constricted in order to foster investor understanding.
Second, the proposals under consideration would require target date fund marketing materials to include a visual depiction — such as a table, chart, or graph — showing a fund's glide path over time. Because investors often are drawn to graphics, rather than narrative discussions, I am hopeful that this new requirement will enable investors to better analyze how a fund's asset allocations are expected to change over time and whether they are consistent with the investor's own expectations.
Third, the proposals would require target date fund marketing materials to include a statement of the fund's asset allocation at the landing point. Again, given the variability of asset allocations at target date funds' landing points, such information will enable investors to better assess the long-term risk profile of a fund — and whether it matches their expectations and risk tolerance. This information also will highlight for investors that many target date funds are constructed to continue well into an investor's retirement, with landing points sometimes falling 20 or 30 years after an investor's retirement.
Finally, target date fund marketing materials would be required to state that a target date fund should not be selected based solely on age or retirement date; that the fund is not a guaranteed investment; and that asset allocations may be subject to change.
Together these amendments are designed to foster investor understanding of target date funds and reduce the possibility that investors will be confused or misled about target date funds' operations and risk profiles.
Before I turn it over to Division of Investment Management Director Buddy Donohue to hear more about the proposals under consideration, I would first like to thank those who worked with Buddy to craft the rules: Susan Nash, Mark Uyeda, Michael Pawluk, Marc Sharma, Devin Sullivan, and Robert Zweig.
Thank you as well to David Becker, Meridith Mitchell, Lori Price, Cathy Ahn, and Sarah Buescher from the Office of the General Counsel; Henry Hu, Adam Glass, Harvey Westbrook, and Jeremy Ko from the Division of Risk, Strategy, and Financial Innovation; and Richard Ferlauto and Owen Donley from the Office of Investor Education and Advocacy.
Now I'll turn to Buddy Donohue to hear more about the staff's recommendation.