On June 16, 2010, the Securities and Exchange Commission (SEC) published for comment proposed amendments to the investment company advertising rules focused primarily on “target date funds” – mutual funds managed to provide a mix of equity and fixed income exposures that changes over time based on an investor’s age, target retirement date or life expectancy (the Proposed Rules). These Proposed Rules are intended to correct a significant disconnect between the expectations of investors in target date funds and the actual management of those target date funds, which was highlighted by the severe market downturn over the last several years, by requiring additional disclosures regarding the management of target date funds and certain risk information in advertising materials.
Target Date Funds
Target date funds are available in a variety of retail markets, but they are particularly popular in 401(k) plans and other retirement plans in which participants direct their investments. Often the “target date” of the fund will be based on a participant’s targeted retirement date, which is typically stated in the title of the fund. For example, a “2050 Target Date Fund” may be designed for investors who expect to retire in 2050. The target date fund’s asset allocation changes over time, gradually becoming more conservative by decreasing exposure to equities as the target date approaches. The schedule by which the asset allocation of the fund changes over time is known as the “glide path.” The end of the glide path, when the target date fund attains its most conservative asset allocation, is known as the “landing point”. For some target date funds, the landing point coincides with the target date of the fund, while other funds may have a landing point as many as 30 years after the target date. Many participants in 401(k) plans invest all or a large portion of their account in a plan in a particular target date fund based upon a vague understanding that it is designed for their age group and a belief that the investment will not require monitoring or rebalancing over time.
Target Date Fund as QDIA
Another reason target date funds achieved such popularity is because the Department of Labor (DOL) approved them as “qualified default investment alternatives” (QDIA) in 2007. By designating a prudently selected QDIA as a default investment, investment fiduciaries can obtain a measure of fiduciary protection for the decision to default all or some portion of the accounts of participants for which no affirmative investment elections were made. This may occur, for example, when participants are automatically enrolled in a plan or when an investment option is eliminated without being replaced by a similar investment option. Participants invested in the QDIA by default will be deemed responsible for their investments to the same extent as if they had affirmatively elected to invest in the QDIA, provided the investment fiduciary prudently selected the QDIA. Accordingly, many plan sponsors have designated target date funds as the QDIA of their plans.
The Target Date Fund Disconnect
Target date funds drew the scrutiny of the DOL and the SEC following the recent economic downturn because of heavy losses sustained by funds with approaching target dates (e.g., 2010 and 2015 funds). The losses resulted from more significant equity concentrations than expected by investors, who often expected their target date funds to have the most conservative asset balance (i.e., to have reached their landing points) at their target retirement date, when in fact the landing points were years away. This raised the question of whether there was a fundamental disconnect between the management of target date funds and the expectations of investors. In response to these events, the SEC and the DOL held a joint hearing in 2009 focused on misunderstandings about the risks associated with target date funds and differences among target date funds with the same target date.
According to the SEC, the Proposed Rules are intended to help clarify the meaning of the date in a target date fund and improve the information provided when these funds are advertised and marketed to investors.  In other words, the Proposed Rules are intended to end the target date fund disconnect.
Amendments to Rule 482 under the Securities Act of 1933 and Rule 34b-1 under the Investment Company Act of 1940
The SEC has indicated that the Proposed Rules are intended to address concerns that have arisen about the potential for investor misunderstanding of target date funds names and concerns that marketing materials may have contributed to a lack of understanding by investors of target date funds and their strategies and risks. Specifically, the Proposed Rules would require advertising materials for all target date funds to  :
- Include in print and electronic medium advertisements (i) a table, chart, or graph depicting the fund’s asset allocation over time (the fund’s glide path); and (ii) a statement highlighting the fund’s final asset allocation (the allocation at the landing point); and
- Include in all types of advertisements a statement that a target date fund should not be selected based solely on age or retirement date, that the fund is not a guaranteed investment, and that the stated asset allocations may be subject to change without a shareholder vote.
Additionally, target date funds that include a target date in their name would be required to:
- Disclose in all types of advertisements the fund’s asset allocation at the target date (or most recent quarterly allocation if on or after the target date) beside the first use of the fund’s name; and
- Disclose in radio and television advertising the fund’s final asset allocation (the allocation at the landing point). 
The foregoing amendments would not become effective until 90 days after adoption in final regulations.
Amendments to Rule 156 under the Securities Act
The Proposed Rules would amend antifraud provisions to provide that it may be a violation of the Securities Act for any investment company’s marketing materials to include statements that:
- Emphasize a single factor, such as an investor’s age or tax bracket, as the basis for determining that an investment is appropriate; or
- Suggest that investing in the securities is a simple investment plan or that it requires little or no monitoring by the investor.
These amendments would apply to all types of mutual funds (not just target date funds). The amendments to Rule 156 would be effective immediately on the effective date of the final regulations.
The Proposed Rules include requests for comments on a number of issues including whether there should be new disclosure requirements in target date fund prospectuses and statements of additional information. Therefore, it is possible that new prospectus and SAI disclosure requirements will be added in the final regulations. Comments should be sent to the SEC by August 23, 2010.
Retirement Plan Sponsors and Investment Fiduciaries
The Proposed Rules reinforce the idea that plan sponsors and investment fiduciaries should be careful that they are not representing target date funds as a “one-size-fits-all” retirement solution for their plan participants, either informally or in written participant communications, because such communications may be considered fiduciary acts under ERISA. While target date funds may be an appropriate investment for many participants and are appropriate to use as default investments for participants who have not made affirmative investment elections, they may not be appropriate investments for all plan participants.