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Investors Need the Full Story on Risk of Target Date Retirement Funds

Posted by on Aug 25, 2010 in Investments, Retirement | 0 comments

WASHINGTON, Aug. 24 /PRNewswire-USNewswire/ — Target date funds’ advertising and marketing materials need to have better disclosure, provide more specific information about their glide path and asset allocation, and include greater descriptions of asset classes, according to recommendations Certified Financial Planner Board of Standards, Inc. (CFP Board) made to the Securities and Exchange Commission on their proposed rules governing target date funds.

“With their easy to understand names and their marketing, many investors incorrectly believe target date funds are simple investment solutions.  They do not realize that target date funds are generally managed to account for factors other than stability of principal approaching the retirement date, including time horizon, risk aversion, longevity risk, and inflation risk,” said CFP Board’s CEO Kevin R. Keller. “The SEC’s proposals do not go far enough to explain to investors that many funds are managed in ways different from those investors may reasonably expect.”

CFP Board’s letter was in response to the SEC’s comment period on the proposed amendments to rule 482 under the Securities Act of 1933 and rule 34b-1 under the Investment Company Act of 1940.

CFP Board, while commending the SEC for taking action to address the issue of target date funds, made recommendations for additional investor protections that fall into three key areas:

  1. Information About Volatility Risk: A target date fund should make clear and prominent disclosures alerting investors when a target date fund’s equity allocation differs materially from the average allocations of peer funds with the same target date. The SEC’s proposal would require disclosure of the asset allocation at the target date along with the first use of a fund’s name.  CFP Board recommended the SEC go one step further and require funds to identify the average target equity allocation for all target date funds with the same target date and disclose the extent to which its target equity allocation differs from the average.  The SEC’s proposal would also require a visual depiction of a fund’s glide path.  CFP Board recommended that the SEC require target date funds to provide a graphical comparison of the average glide path for all target date funds with the same target date along with the fund’s stated glide path.
  2. Information About the Glide Path and Asset Allocation: A target date fund’s disclosures must be aimed at enhanced understanding of a target date fund’s glide path and asset allocation at the target date and landing point. Specifically, CFP Board recommended that the SEC require sufficient disclosures to allow investors to know whether the glide path is designed to extend “to” or “through” the target date, including a narrative statement immediately following the required disclosure of the fund’s asset allocation and a table, chart or graph that visually depicts the glide path.
  3. Information About Asset Sub-Classes: A target date fund should disclose additional information about specific asset sub-classes in which it invests.  CFP Board expressed concern that the broad asset classes of equity, fixed income, and cash are so broad that they do not communicate sufficient information about a fund’s actual asset allocation, investments, and risks. READ MORE

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