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SEC Announces New Target-Date Fund Rules

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The U.S. Securities and Exchange Commission (SEC) recently proposed new rules for target-date funds that aim to provide enhanced information to investors.

Here are the key points from SEC chairman Mary Schapiro’s statement on the proposed rules:

- A proposal to require advertisements and marketing materials for target date funds that include a date in their name to also include the fund’s expected asset allocation at the target date.

“The asset allocation would appear immediately adjacent to the fund’s name. For example, the XYZ 2020 Target Date Fund would include a tagline adjacent to its name that would say, hypothetically, “40% equity, 50% fixed income, 10% cash in 2020.”

“Such information would enable investors to assess the asset allocation variability among target date funds, and consider whether the asset allocation meets the investor’s conservative, moderate, or aggressive expectations.

“The tagline gives investors more than just a date to go on when looking at a fund name in advertising and marketing materials. At the same time, the tagline next does not overwhelm an investor with complicated financial information.

“Under the proposal, ranges such as “40-45% in equity” would be permitted in the tagline. I am particularly interested in public comment on whether such ranges are appropriate, or whether they should be constricted in order to foster investor understanding.”

- Require target-date fund marketing materials to include a visual depiction — such as a table, chart, or graph — showing a fund’s glide path over time.

“Because investors often are drawn to graphics, rather than narrative discussions, I am hopeful that this new requirement will enable investors to better analyze how a fund’s asset allocations are expected to change over time and whether they are consistent with the investor’s own expectations.’ “

- Require target-date fund marketing materials to include a statement of the fund’s asset allocation at the landing point.

“Given the variability of asset allocations at target date funds’ landing points, such information will enable investors to better assess the long-term risk profile of a fund — and whether it matches their expectations and risk tolerance.

“This information also will highlight for investors that many target date-funds are constructed to continue well into an investor’s retirement, with landing points sometimes falling 20 or 30 years after an investor’s retirement.”

-Target date fund marketing materials would be required to state that a target-date fund should not be selected based solely on age or retirement date; that the fund is not a guaranteed investment; and that asset allocations may be subject to change.

The SEC’s full proposal is available online.


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