The SEC and the Department of Labor convened a hearing Thursday to decide whether to tighten the rules for financial services companies that offer target-date funds in their 401(k) plans.

TDFs have become an increasingly popular investment in 401(k) plans, allowing participants to enroll in a plan that is supposed to adjust its asset allocation, and become more conservative, as they near retirement. However, many of the TDFs sustained heavy losses last year and questions have been raised about whether participants, particularly older workers who saw their retirement savings decimated, properly understood the risks.

“The ‘set it and forget it’ approach of target date funds can be very appealing to investors,” said SEC Chairman Mary L. Schapiro. “Target-date funds were expected to make investing easier for the typical American and avoid the need for investors to constantly monitor market movements and re-align personal investment allocations. But the reality of target-date funds was quite surprising to many investors last year.”

She cited estimates that the average loss in 2008 among 31 funds with a 2010 target date was almost 25 percent, and that the returns of 2010 target-date funds in 2008 ranged from -3.6 percent to -41 percent. “These varying results should cause all of us to pause and consider whether regulatory changes, industry reforms or other revisions are needed with respect to target date funds,” said Schapiro.

“The train went off the tracks with target-date funds,” said Joseph C. Nagengast, a principal with Target Date Analytics. He believes the funds should be relabeled and renamed to reflect their actual “glide path.”

Among the risks in the funds are savings, mortality, longevity and inflation, according to Morningstar analyst Rod Bare.

Mark Wayne, president of Freedom One Investment Advisers, representing the National Association of Independent Retirement Plan Advisors, said there needs to be better information about TDFs and their usage in the 401(k) market. “Plan sponsors and participants need a clear understanding of the different asset allocation strategies employed by different target-date funds in their plans,” he said.

He believes the current disclosure requirements under securities law are inadequate, do not meet a “truth-in-labeling” approach, and produce confusion among plan sponsors and participants about the true meaning of “target date.” Wayne recommended that fund managers should disclose, in plain terminology, when the fund no longer needs a rebalance because it has reached the appropriate mix of stock, bonds and cash. Typical language in a TDF prospectus describes the fund’s investment objective simply to “provide capital appreciation and current income consistent with its current asset allocation,” which he believes is clearly not enough information.


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