New SEC Proposals

The Securities and Exchange Commission's recent preliminary proposals to have target-date funds show their asset allocations have been broadly welcomed, however there are questions about whether the proposals will do enough to help the investors in choosing the most appropriate fund.

Proposal critics believe that while the rules would force funds to explicitly portray how the funds would be allocated between stocks, bonds and cash at a target-date fund's maturity date, they wouldn't reflect the risk carried by those allocations. Where stocks are concerned, investing in U.S. blue-chip companies is typically less risky than buying emerging-market company stock. Plans to force "target date" mutual funds to disclose their investment strategies do not appear to do quite enough to let investors clearly determine the risks involved.

We believe that the most effective disclosure would be to list the fund's full allocation at maturity, or to list only the stock holding, tracking how it declines through to the maturity date. Alternatively, a fund would have to include an aggressive/moderate/conservative label in its name to make its approach clear.

SEC proposals suggest the allocation should be "immediately adjacent to the first use of the fund's name in marketing materials.” However the(SEC) proposals are not clear about precisely how the fund would be portrayed in the investor's statement - which is typically the only document an investor is nearly guaranteed to read.

We encourage a system that will show how much a target-date fund's allocations could lose, by stating in terms of percentage, how much was lost during the worst period. For any funds invested for five or more years, this also would portray the worst loss and when it occurred.

Having disclosure of a target-date fund's risks is singularly important since many investors began the funds by default in their 401(k) plans. Investors actively choosing their own funds generally do so because they want to allow their funds make the asset-allocation decisions.

Lastly, this issue underscores the importance of working with a competent plan consultant who can direct a targeted education campaign to further educate plan participants as to the risks they are taking with their investments.