SEC and DOL’s EBSA Hearing on Target Date Funds

On June 18, 2009, the Securities and Exchange Commission and the Department of Labor’s Employee Benefits Security Administration held a hearing at the Department of Labor building in Washington, D.C. on issues relating to investments in target date funds and similar investment options by 401(k) plan participants and other investors. The hearing was announced on May 19, 2009. Requests to testify at the hearing, testimony of witnesses, and other materials are available on the Department of Labor’s Web site.

CFP Board Chair Marilyn Capelli Dimitroff, CFP®, outlined CFP Board’s proposals to enhance consumer safeguards for investors who use target date funds. Ms. Capelli Dimitroff’s testimony is available here.

Target date funds are investment vehicles that allocate their investments among various asset classes and automatically shift that allocation to more conservative investments as a “target” date approaches. This shift in asset allocation can vary significantly among funds using the same target date. In recent years, target date funds have grown increasingly popular in employer-sponsored retirement plans.

CFP Board testified that these funds are fundamentally misleading to investors because they are allowed to be managed in ways that are inconsistent with reasonable expectations that are created by titles used on the funds. It is not an answer to say that misleading fund names can be cured with effective disclosures. It is necessary to face the reality that disclosures are very often not read and more often not fully understood. Disclosures are simply not adequate to counteract the reasonable expectations created by a fund’s name.

In 2008, target date funds with 2010 in their name had losses ranging from 3.6 percent to 41 percent. “We believe that a loss of up to 41% of assets from a fund labeled 2010 is completely inconsistent with an investor’s reasonable expectation that his or her assets would not be subject to such high market volatility,” Dimitroff said.

CFP Board recommended that the SEC amend its misleading names rule to provide that a target date fund’s name is a materially deceptive and misleading name unless the fund’s investments fall within an acceptable range of asset allocations consistent with its name. If efforts to put such standards into place are not undertaken or not effective, the Department should proceed on its own to regulate target date funds that are used in 401(k) plans, or, repeal such funds’ eligibility as qualified default investment alternatives in employer-sponsored retirement plans.

A press release regarding Ms. Capelli Dimitroff’s testimony is available here. You can also access a statement by Ms. Capelli Dimitroff regarding her testimony here.

On October 28, 2009, CFP Board submitted a written statement to the Senate Special Committee on Aging as part of the record for the Special Committee’s hearing titled “Default Nation: Are 401(k) Target Date Funds Missing the Mark?” In its written statement, CFP Board expressed serious concerns that target date funds can be fundamentally misleading to investors because they are allowed to be managed in ways that are inconsistent with the reasonable expectations created by the funds’ names. CFP Board urged the Special Committee to work closely with the SEC and Department of Labor to establish appropriate protections to ensure that target date funds can continue to be used in retirement savings plans as qualified default investment alternatives with confidence that they reflect appropriate, industry-sanctioned investment decisions on behalf of plan participants.