New Target-Date Fund Disclosures Proposed

Labor Department aims to put investor warnings on target-date funds.


The Labor Department proposed a rule this week that would require new disclosures about how target-date funds work. The regulation would require 401(k) plan sponsors to explain how the target-date fund’s mix of stocks, bonds, and cash will change over time and when the fund will reach its most conservative position.

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These automatically rebalancing funds are one of the fastest growing 401(k) investment choices. New employees are often automatically enrolled in target-date funds as a default investment if they fail to make their own investment choices. Consequently, many investors may not fully understand how their money is being allocated.

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The Labor Department proposal would require a graphical illustration of how the asset allocation of the fund will shift. The relevance of the year in the fund’s name must also be explained. For example, some target-date funds stop rebalancing to a gradually more conservative asset allocation upon reaching the year in the fund’s name, while other funds continue to make investment changes for years into retirement. The rule would require plan sponsors to warn participants that they could lose money by investing in a target-date fund, even close to retirement.

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

The Securities and Exchange Commission introduced similar target-date fund disclosure rules in June, but has not yet issued a final regulation. “Based on our collaborative examination of this issue with the Securities and Exchange Commission, it is clear that all participants in participant-directed individual account plans can benefit from better information about how target date investments are designed to meet their retirement savings needs," says Phyllis Borzi, assistant secretary of labor for the Employee Benefits Security Administration. The Labor Department will accept comments on the rule until Jan. 14, 2011.