Why Critics Are Still Skeptical About Target-Date Funds

Some say a new proposal doesn't go far enough.


In a bid to increase transparency, the Securities and Exchange Commission has proposed modest changes to the disclosure rules governing target-date funds. Under the new proposal, providers of these popular products would be required to prominently display--both in print and online marketing materials--a table, chart or graph about each fund’s glide path. A glide path reflects how a fund’s allocation to stocks and bonds change over time. Target-date funds start with heavy allocations to stocks and gradually become more conservative. Providers would also have to explain the glide path in writing. The proposal applies to funds that have a retirement date in their name (for instance Vanguard Target Retirement 2030).

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Target-date funds are meant to be hands-off investments for workers who are saving for retirement. While still quite popular, they’ve come under heavy fire as a result of their performance during the downturn. In 2008, for instance, the average target-date 2010 fund lost 24 percent, according to the SEC. For investors who assumed that with their retirement date approaching, their funds would have the vast majority of their assets in bonds, these losses came as an unwelcome surprise.

The proposal, which aims to avoid similar surprises in the future, has gotten a receptive response from the fund industry. The Investment Company Institute, which serves as the trade group for mutual funds, said in an e-mail that it “supports the SEC’s continued efforts to enhance investor understanding of target-date funds.”

Still, others are more skeptical. Dick Michaud, the president of New Frontier Advisors, says that while “knowing more about what the funds are is certainly useful for investors,” the SEC has left other important questions unaddressed. Chief among them, he says, is whether target-date funds should continue to considered acceptable default investments in retirement plans.

Joseph Nagengast, a principal at the research firm Target Date Analytics, accuses the SEC of capitulating to pressure from fund companies. He argues that the real problem is that many target-date funds don’t reach their most conservative allocations until years after the date on the name of the fund has passed.

Take, for instance, T. Rowe Price’s Target Retirement 2025 fund. The fund’s allocation to stocks eventually decreases to 20 percent, but it doesn’t do so until 2057--more than 30 years after the retirement date. “The only disclosure that will do any good would be to require that the date in the name of the fund be the date at which the allocation reaches its most conservative position,” Nagengast says. “We’re doing all this disclosure to try to explain that something isn’t what it says it is. Why not just require [providers] to name funds properly?”

The SEC will accept public comments on its proposal for 60 days. After that period, a final version can be approved.