On June 18, 2009, the SEC and the Department of Labor (DOL) held a joint hearing to address concerns regarding target date mutual funds. Target date funds are mutual funds that allocate their investments among various asset classes, automatically adjusting their allocation to more conservative investments as their target date approaches. Because of their “set it and forget it” appeal, target date funds are a rapidly growing industry. They are available in approximately 77 percent of company retirement plans and are often used as default investment selections because they are approved as a qualified default investment alternative by the DOL. Target date funds are forecasted to make up 20 percent of defined contribution savings by 2010, and 33 percent by 2015.

Despite their popularity with investors, target date funds have recently faced sharp criticism due to the widely divergent performance figures of funds with the same target date during the 2008-2009 market turmoil. According to SEC Chairman Mary Schapiro, in 2008 for example, losses among 2010 target date funds ranged between -3.6 percent and -41 percent. The divergence has highlighted the fact that funds with the same target year may have varying investment strategies and approaches to asset allocation. Consequently, the SEC and others have expressed concern that the names of target date funds lead investors to make incorrect assumptions about income guarantees and asset allocation/ risk exposure of the funds on certain dates.

Several different recommendations were made to the SEC and DOL at the joint hearing. Sen. Herb Kohl (D-Wis.), chairman of the Senate Special Committee on Aging, recommended regulations to standardize the composition of target date funds. Industry representatives, however, strongly opposed regulations that would cap equity exposure or otherwise standardize asset allocation paths (glide paths) that funds follow to reduce their equity exposure and become more conservative over time. The Investment Company Institute (ICI) recommended better educating investors about divergent investment strategies of target date funds by disclosing the following in a prominent manner:

  • The relevance of the target date, including what happens on that date;
  • The fund’s assumptions about investors’ withdrawal intentions at and after the target date;
  • The age group for which the fund is designated;
  • An illustration of the fund’s glide path; and
  • A statement in the risk disclosure section that indicates that there are investment risks associated with target date funds and that the fund is not guaranteed.

Thus far, the SEC has stated that it will examine whether the use of a particular target date in a fund’s name is misleading, and consider whether its rule governing fund names should be revised to require clarification when target dates are included in fund names.