More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
Results of a study just released by the Securities and Exchange Commission assessing investors’ understanding of target-date retirement funds (TDFs) and advertisements related to those funds confirm that investors have a number of misconceptions about them.
The SEC announced Tuesday that it was now seeking comments on those results, and would consider the comments received before acting on a proposal the agency issued in 2010 intended to enhance the information provided to TDF investors.
Eileen Rominger, director of the SEC’s Office of Investment Management, announced last December that the SEC would be conducting “investor testing” as part of its rulemaking efforts on TDFs, to help the agency assess “the types of information that investors believe are most useful when they choose their investments.”
In 2010, the SEC proposed rule changes to address concerns regarding target-date fund names and information presented in marketing materials, Rominger said in her December speech to securities lawyers.
“After we analyze the testing data and consider public comments on the proposed rule, the division will evaluate whether to recommend that the commission adopt rule changes to address target-date funds,” she said.
The study, sponsored by the SEC and conducted by Siegel+Gale, provides data on individual investors’ use, comprehension and perceptions of TDFs, tested via an online panel survey of 1,000 investors. Investors were asked questions after reviewing documents containing information about a hypothetical target-date retirement fund. The documents included versions revised to reflect the changes proposed by the Commission.
Some of the key findings of the study include:
- Overall, many survey respondents have some misconceptions about the point at which the asset allocation of a TDF stops changing.
- Many respondents believed that the target date is the point at which the fund is at its most conservative allocation and that the allocation stops changing thereafter.
- Understanding that the allocation continues to change after the target date was greater among those who viewed the two documents containing the glide path illustration than among those who viewed the two documents that did not contain the glide path illustration.
- Only 36% of respondents correctly indicated a TDF does not provide guaranteed income in retirement.
- The 50 to 65 age group tended to be more knowledgeable about TDFs, but there was not much variation in comprehension between 21 to 34 year olds and 35 to 49 year olds.
- Respondents who own TDFs were more knowledgeable than those who do not own TDFs. Among respondents who own TDFs the most knowledgeable were individuals who chose their investments in their employer-sponsored retirement plan (“employer-sponsored only; not default”); they scored nominally higher than those who hold TDFs in IRAs or other accounts and those who invested in a TDF by default (“employer-sponsored only; default”).
As of October 2011, assets in target-date funds had reached approximately $360 billion, Rominger said in her December speech. The new cash flow that target-date funds netted in 2010, she said, was more than 10 times what it was 10 years ago.
The just released survey found that 96% of respondents who own TDFs hold them in employer-sponsored plans or IRAs; employer-sponsored accounts were most common at 75%.
“The increasing significance of target-date funds in 401(k) retirement plans—together with the market losses suffered in 2008—gave rise to concerns about those funds,” Rominger said in December.