Target Date Mutual Funds: Proposed Rules and Recommendations

April 16, 2014

On April 3, 2014, the SEC asked for comments on proposed Rule 33-9570, titled "Investment Company Advertising: Target Date Retirement Fund Names and Marketing." The SEC had originally proposed and accepted comments on this rule in 2010, but it never took action on the proposal. "Target date funds" are a hybrid of stocks, bonds and cash, designed for a specified time-frame which is dependent on the particular investor. For example, someone planning for retirement in 2030 might have a target date fund set for that date.

The Dodd-Frank act, passed by Congress in 2012, created an Investor Advisory Committee within the SEC to offer recommendations to the SEC on various issues such as regulation of securities products, regulatory priorities, fee structures, and other initiatives to protect investor interests. The committee is authorized to submit their findings to the SEC for review and consideration. On April 11, 2013 the Committee issued recommendations regarding target date funds.

The recommendations suggested by the Committee include:

i) alterations to the fund's "glide path illustration;"
ii) adoption of a standard methodology for designing these illustrations;
iii) increased prospectus disclosures;
iv) marketing materials requirements; and
v) expanded fee disclosures.

The SEC is now reopening the Target Date Funds proposed rule to public comment, specifically seeking comment relating to the Advisory Committee's recommendations relating to such funds' "glide paths."

The recommendations of the Investor Advisory Committee are fueled by several concerns surrounding the use of target date funds. In 2008, target date funds that were approaching their target dates experienced a wide range of volatility despite having identical target dates. The reason for this volatility, the Committee concluded, is that these mutual funds have a very divergent foundation of assets and investment strategies that were not apparent to investors.

The Committee would like to have a standardized set of glide path illustration to prevent gross differences in performance of target date funds. One of the main purposes of the glide path illustrations is to create a method of comparing different target date funds to determine which fund is a better risk to take. Both the SEC and the Committee are concerned that the current use of these illustrations is incomplete at best and misleading at worst. To remedy this, the Committee suggested that glide paths be updated frequently, that their calculation methodology be standardized, and that they be accompanied by explanations of the level or risk associated with the underlying assets and the investment strategy. These additions are intended to increase an investor's ability to conduct side-by-side comparisons between funds.

The SEC's proposed rule, and the Committee glide path recommendations, if promulgated as part of a final rule, would expand the disclosures that investment companies are required to provide to investors of any fund that advertises a target date in its title.

The public has until June 9, 2014 to comment on this rule and the Committee's recommendations. The proposed rule can be found on the SEC website here and the Investor Advisory Committee's recommendations are at this location.