Target Date Funds a “Particular Focus” For SEC

The Securities and Exchange Commission (SEC) is taking a hard look at retirement products, including the positioning of target-date funds.

Speaking at the Solutions Forum on Fraud in Washington, D.C., Securities and Exchange Commission Chairman Mary L. Shapiro said that “America’s future retirees deserve products that they can understand and evaluate,” going on to clarify that that means that “complex fee arrangements or product descriptions should be discarded in favor of simple, clear disclosure.” 

Shapiro noted that between 1975 and 2005, the number of active participants in traditional defined benefit plans dropped from 26 million to 21 million, while those who actively participated in defined contribution plans increased five-fold from 11 million to 55 million.  “In my view,” Shapiro said, “financial service firms should engage in responsible product development in the retirement market. Barraging investors with retirement products that feature the latest financial gimmick or marketable fad will not ultimately serve investors’ interests.”

Areas of Focus 

She went on to note that disclosure, product development and marketing issues surrounding retirement products “will be areas of focus in the coming year for those of us at the SEC.”  

Shapiro said that an area of “particular focus” for the agency was target-date funds, products that she said were “products specifically designed for the retirement market”.  She explained to the audience that the “set it and forget it” approach of target-date funds can be very appealing to investors, “especially for retirement investors who are overwhelmed by more complicated investment options”.  And while she went on to cite the growth in target-date fund assets, she also said that “the performance of these funds was quite surprising last year”, going on to cite reports that the average loss in 2008 among 31 funds with a 2010 target date was almost 25%.  “Perhaps even more surprising were their widely varying performance results,” she said, noting that in 2008, target-date funds for 2010 suffered losses of “as little as 4% to as much as 40%.” 

Shapiro said that the SEC is focusing on the use of a target date in a fund’s name and “how the meaning of that date — and the nature of a fund’s investments — can be better communicated to investors”.  She also said the agency is “closely reviewing” advertising, marketing materials and related disclosure to determine whether investors are receiving accurate messages about their target-date funds.