When the comment period on the Securities and Exchange Commission's proposed rules on target date funds closed on Aug. 23, the SEC received only 44 recommendations from industry officials and lawmakers. That number was unusually small, considering the growing popularity of target funds—and the controversy surrounding them.
Assets of target date funds registered with the SEC now total approximately $270 billion, and yet many investors don’t understand the risks and benefits associated with this increasingly popular retirement-savings vehicle. Indeed, when the markets tanked in 2008, target date funds themselves became a target of criticism. The big complaint was that many funds’ asset allocations contained an unduly high percentage of money-losing equities for people who were hoping to retire in 2010.
In response, SEC Chairman Mary Schapiro asked her staff to prepare recommendations about how target-date funds are marketed, and on June 16 the SEC proposed rules that would help clarify the meaning of the date in a target-date fund and improve the information provided when these funds are advertised.
Schapiro also said that the proposed rules "would enable investors to better assess the anticipated investment glide path and risk profile of a target-date fund by, for example, requiring graphic depictions of asset allocations in fund advertisements." The rules also "would require an asset allocation 'tag line' adjacent to a target-date fund's name in an advertisement," she said.
While the 44 responses to the SEC’s request for public comment were few, they came from major players in the world of target-date funds, including Harvard Law School’s Pensions and Capital Stewardship Project, corporations such as BlackRock and Morningstar, and industry and lobbying groups such as the Association for the Advancement of Retired Persons (AARP). All 44 comments on the rule amendments have been published in the Federal Register.
Asset Allocation Tag Lines Questioned
One such comment came from Manning & Napier Advisors Inc., a $30 billion Rochester, N.Y.-based asset manager that has long specialized in target-date funds. Manning & Napier’s Patrick Cunningham, who was appointed CEO in June and is the first to lead the firm since founder Bill Manning retired, spoke about his firm’s position on the SEC’s target date rule proposal in a Sept. 21 interview with AdvisorOne.
Overall, Manning & Napier supports the SEC’s desire to increase investor awareness and understanding of target date funds via greater disclosures. But according to comment writer Jeffrey Coons, Manning & Napier’s president, the firm disagrees with the proposal to require asset allocation tag lines in or near the name of a target date fund because placing too much emphasis on the target date asset allocation unduly ignores the retirement period following the target date.
During the interview, Cunningham discussed trends in the target-date fund industry, in which he has participated for more than 25 years. He touched on issues ranging from the SEC’s potential regulations, to investors’ retirement savings, to the future of the lifecycle industry.
Advisor One: You sent your letter to the SEC just under the wire, on Aug. 23—the same day that the comment period closed. Why did you write your letter to the SEC?
Cunningham: We’re passionate about our business, and we believe that lifecycle target date funds play a valuable role for retirement. The statistics show that when people make their own asset allocation decisions, the average investor does a very poor job. A Dalbar Inc. study shows that over the last 20 years, the average return of the S&P 500 has been close to 10% compared to how the average equity mutual fund investor does, which is closer to 4% per year. People trade on emotion, whether it’s optimism or pessimism, and that typically results in the wrong decision at the wrong time. Having someone do the asset allocation for the participant has great value.
‘There’s Something Wrong With This Mousetrap’
AdvisorOne: Please spell out the basic problem that the SEC is studying.
Cunningham: Sen. Herb Kohl, D-Wisc., was one of the leaders in pointing out some of the deficiencies with lifecycle funds, and rightfully so, in our opinion. The issue is that in 2008, we saw people who were about to retire in 2010 lose a third of their money in certain lifecycle 2010 funds because we were in a bad market in 2008 that continued into 2009. If I’m about to retire, and I just lost a third of my money, there’s something wrong with this mousetrap. That’s why the SEC and the finance community in Congress started looking into this and asking, “What’s going on?” The first thing they realized was that different mutual fund providers have very different glide paths.