New Disclosures Proposed for Target-Date Funds

How the new rules could affect your 401(k) decisions.

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Federal regulators proposed new target-date fund disclosures yesterday. The Securities and Exchange Commission voted unanimously to introduce rule amendments requiring that specific information be provided to target-date fund investors. Here’s a look at the proposed rules, which will be open for public comment for the next 60 days.

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Asset allocation disclosures. Marketing materials for target-date funds that include a date in the fund name would be required to disclose the asset allocation of the fund. The proportion of the fund invested in equity securities, fixed income securities, cash, or other investments would need to appear with the fund’s name the first time it is used in promotional materials. “The XYZ 2020 Target Date Fund would include a tag line adjacent to its name that would say, hypothetically, "40 percent equity, 50 percent fixed income, 10 percent cash in 2020," says SEC Chairman Mary Schapiro. “The tag line gives investors more than just a date to go on when looking at a fund name in advertising and marketing materials. At the same time, the tag line does not overwhelm an investor with complicated financial information.”

Glide path chart. The proportion of a target-date fund invested in stocks, bonds, and cash changes as the fund approaches the designated retirement date and sometimes continues to grow more conservative throughout retirement. Marketing materials would be required to include a prominent table, chart, or graph that depicts how the asset allocation of the fund changes over time. A statement accompanying the chart must state the date the fund mix stops changing and the final asset allocation.

[See 5 Questions to Ask About Your Target-Date Fund.]

Required warnings. If the SEC’s rules become adopted in their current form, target-date funds will be required to include statements informing investors of the fund’s risks. Investors must be cautioned to consider their individual risk tolerance, personal circumstances, and complete financial situation. Informational materials would need to point out that the fund is not guaranteed and that it is possible to lose money by investing in the fund. Retirement savers must also be informed about whether the asset allocation of the fund may be modified without a shareholder vote.

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Marketing restrictions. The SEC is considering prohibiting marketing materials from suggesting that an investment is appropriate because of a single factor, such as age or tax bracket. Investment companies would also be unable to market securities as a simple investment plan that requires little or no monitoring.

Tell us, will these disclosures make it easier to understand your target-date fund?