A Picture is Worth a Thousand Words
Chip Castille Managing Director Head, US Defined Contribution, BlackRock, said what is most important for retirement investors to understand is how asset allocation changes over time, and disclosure of the target-date fund asset allocation, presented in a graph or chart (see SEC Releases Target-Date Fund Disclosure Proposal), would permit investors to visualize the glide path in relation to their own time horizon. “This disclosure emphasizes the function of a TDF and would also help investors understand how asset allocation changes over time,” according to Castille.
Castille suggested that text accompanying the chart would state explicitly that the asset allocation could change from what the chart illustrates based on changes in the managers' assumptions as to retirement readiness, longevity and market risk. Further, the disclosure would also state what types of investments are included in each asset class, and investors would be specifically informed that investment in target-date funds, like all investments in securities, are not guaranteed, and that they should review their investment decision periodically to make sure the time horizon of the fund in which they are invested reflects their expected retirement timing assumptions.
Castille warned the SEC to be cautious not to require so much information that these investors, as well as DC plan participants, are overwhelmed and thereby distracted from making sound decisions about their retirement assets.
Karrie McMillan, General Counsel, Investment Company Institute, said: “The glide path illustration is the most effective way to communicate the features of a target date fund to investors and is the most important element of the Commission's proposal because it presents all the information about changing asset allocation at a glance. The glide path should highlight asset allocation at the fund's target date and landing point.”
Scott Goebel, Senior Vice President and General Counsel, Fidelity Management & Research Company, agreed with the SEC’s approach of not specifying asset classes required to be shown or the methodology for calculating the assets belonging to particular asset classes. He also urged the Commission not to require the disclosure of permissible allocations and ranges, saying rules limiting a portfolio manager's ability to adjust a fund's asset allocation to address extreme market conditions or evolving portfolio management strategies would not be beneficial for shareholders.
However, Laura Pavlenko Lutton, Editorial Director, Fund Research Group, Morningstar, Inc., suggested that target-date fund providers also include the table of data from which they derive their graphics, saying supplying one without the other makes it difficult to accurately compare multiple series.
Morningstar also suggested that the SEC require further disclosure, for example, a fund’s intended subasset class allocation within broader asset classes. Pavlenko Lutton noted that two funds with identical equity-bond-cash allocations may have very different risk profiles. One fund predominantly invested in equities tied to commodities and in bonds rated junk may be much more volatile than one invested mostly in blue-chip, U.S.-based stocks and short-duration government bonds. The goal of the subasset class disclosure is to help investors gauge target-date series’ risk profiles, anticipate how the funds may behave in various market conditions, and measure returns, she said.