U.S. planners critical of target date funds

Target date funds are coming under attack in the U.S., with critics saying they need to provide investors with better transparency. The call isn’t coming from some motley gang of investor advocates either — it’s coming from the Certified Financial Planner Board of Standards (CFB Board).

“Many investors incorrectly believe target date funds are simple investment solutions,” says CFP Board’s CEO Kevin R. Keller. “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.”

Keller’s critique came in response to the Securities and Exchange Commission’s (SEC) call for comments on proposed changes to the Securities Act of 1933 and the Investment Company Act of 1940.

“The SEC’s proposals do not go far enough to explain to investors that many funds are managed in ways different from those [that] investors may reasonably expect,” Keller says.

He went on to say that the marketing materials for target date funds need to have better disclosure, provide more specific information about their glide path and asset allocation, and include greater descriptions of asset classes.

As the proposals currently stand, a fund manufacturer would only need to disclose asset allocation at the first use of the fund’s name and then again at the target date.

The CFP Board says the SEC should 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 regulator should also 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.

The CFP Board also wants the SEC to require the funds disclose whether the glide path is designed to extend “to” or “through” the target date.

The funds should also be required to disclose additional information about specific asset sub-classes in which it invests, rather than simply stating “equities”, “bonds” or “cash”.

“Simply disclosing a fund’s asset allocation without providing a baseline from which to compare to other funds fails to provide meaningful investor protection,” Keller says. “Disclosing only the broad asset classes in which two target date funds invest may not convey the level of investment risk presented where they follow different investment strategies within a broader asset class.”

(08/24/10)