Charts and Graphs Are Good, but Don’t Change Target-Date Fund Names

A Picture is Worth a Thousand Words  

Chip Castille Managing Director Head, US Defined Contribution, BlackRock, said what is most important for retirement investors to understand is how asset allocation changes over time, and disclosure of the target-date fund asset allocation, presented in a graph or chart (see SEC Releases Target-Date Fund Disclosure Proposal), would permit investors to visualize the glide path in relation to their own time horizon. “This disclosure emphasizes the function of a TDF and would also help investors understand how asset allocation changes over time,” according to Castille.  

Castille suggested that text accompanying the chart would state explicitly that the asset allocation could change from what the chart illustrates based on changes in the managers’ assumptions as to retirement readiness, longevity and market risk. Further, the disclosure would also state what types of investments are included in each asset class, and investors would be specifically informed that investment in target-date funds, like all investments in securities, are not guaranteed, and that they should review their investment decision periodically to make sure the time horizon of the fund in which they are invested reflects their expected retirement timing assumptions.   

Castille warned the SEC to be cautious not to require so much information that these investors, as well as DC plan participants, are overwhelmed and thereby distracted from making sound decisions about their retirement assets.  

Karrie McMillan, General Counsel, Investment Company Institute, said: “The glide path illustration is the most effective way to communicate the features of a target date fund to investors and is the most important element of the Commission’s proposal because it presents all the information about changing asset allocation at a glance. The glide path should highlight asset allocation at the fund’s target date and landing point.”  

Scott Goebel, Senior Vice President and General Counsel, Fidelity Management & Research Company, agreed with the SEC’s approach of not specifying asset classes required to be shown or the methodology for calculating the assets belonging to particular asset classes. He also urged the Commission not to require the disclosure of permissible allocations and ranges, saying rules limiting a portfolio manager’s ability to adjust a fund’s asset allocation to address extreme market conditions or evolving portfolio management strategies would not be beneficial for shareholders.  

However, Laura Pavlenko Lutton, Editorial Director, Fund Research Group, Morningstar, Inc., suggested that target-date fund providers also include the table of data from which they derive their graphics, saying supplying one without the other makes it difficult to accurately compare multiple series.  

Morningstar also suggested that the SEC require further disclosure, for example, a fund’s intended subasset class allocation within broader asset classes. Pavlenko Lutton noted that two funds with identical equity-bond-cash allocations may have very different risk profiles. One fund predominantly invested in equities tied to commodities and in bonds rated junk may be much more volatile than one invested mostly in blue-chip, U.S.-based stocks and short-duration government bonds. The goal of the subasset class disclosure is to help investors gauge target-date series’ risk profiles, anticipate how the funds may behave in various market conditions, and measure returns, she said. 

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What’s in a Name?  

In his comment to the SEC regarding its proposed rules for target-date fund disclosures, Castille said BlackRock believes no significant change to the naming convention for target-date funds is needed.   

Castille said the current use of a date is a simple approach that is designed to assist investors in selecting the fund most appropriate for them. “We are concerned that the Commission's proposal to add asset allocation information to the name of the fund will confuse rather than assist investors,” he wrote.  

As currently proposed, the funds would be required to indicate a short-hand asset allocation as of the target year. BlackRock believes many investors will mistake this for current allocations or will simply not understand the short-hand. In addition, Castille said this short-hand is not sufficient to describe the risks of various asset classes or sub-asset classes. For example, an actively managed international small cap fund would be considered an "equity" fund as would a U.S. large cap index fund, yet these two funds would have very different risk profiles.   

Goebel noted that for marketing materials describing a number of funds in a given complex's target date lineup, target-date asset allocation disclosure will be the same for each fund that has the same glide path, and would not assist investors in determining which fund is an appropriate investment. He said Fidelity also believes the disclosure would be of limited use to investors comparing target-date funds offered by multiple providers.  

Pavlenko Lutton, said Morningstar is also concerned that the proposed naming change may place too much emphasis on one moment and give the mistaken impression to investors that a target-date fund’s asset allocation won’t shift after the retirement date. Morningstar suggests that the Commission strike this proposed requirement.  

Some commenters also expressed concern that proposed rule 156 would provide that a statement that an investment in a fund is appropriate could be misleading if it places emphasis on a single factor (such as age) or because of representations that the fund is a simple investment plan or requires little or no monitoring. Goebel noted that target-date funds typically are designed as single fund retirement solutions, and the most important single selection criteria for most investors is the investor's intended retirement date. He requested that the SEC consider revising the proposed amendments to provide that such statements may be misleading only if they do not include additional risk disclosure.  

Edward Ferrigno Vice President, Washington Affairs, Profit Sharing/401(k) Council of America, agreed with concerns about Rule 156 changes, as did McMillan of the ICI. 

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Other Suggestions  

Goebel also requested that the SEC clarify how the proposed rules would apply to marketing materials for a complex's overall product line or materials intended for use by retirement plans and their participants. He said Fidelity recommends that the Commission exempt specific types of materials, such as marketing materials that do not reference a specific target-date fund or funds (e.g., family ads) or communications that are not intended as marketing materials (e.g., shareholder reports and retirement plan enrollment materials).   

Fidelity also requested that the Commission provide an exception for materials where inclusion of this information is not practicable, such as post cards and materials designed for viewing on mobile communications devices. Such exceptions could be conditioned upon the availability of information contained in the fund's prospectus, on a Web site or upon request from the party publishing the marketing material, according to Goebel.   

Both Fidelity and ICI recommended that the SEC consider a "one--click away" approach for electronic communications, which has proven effective for communications with limitations on space.  

McMillan said ICI supports the Commission's narrative disclosure, but modified in several respects, including that the Commission not apply all of the narrative disclosure requirements to radio, television, or other similar modes of communication. Similarly, we support the Commission's approach of not applying the proposed illustration requirement to radio, television, or other similar modes of communication.  

In addition, Goebel urged the SEC not to define "target-date fund" as any fund with a date in the name because such a definition would capture certain funds designed to help investors manage assets after retirement, such as Fidelity's Income Replacement Funds. Goebel noted that these funds are not designed to help investors save up to and through a target retirement date; instead, they are designed to enable investors to withdraw money over time up to a target year after which remaining principal is returned to the investor. “Because these funds have an entirely different type of target-date, they should not be subject to the same disclosure requirements,” Goebel said.  

Like lawmakers responding to the SEC’s proposed rules, McMillan said the ICI recommends that the DoL impose similar rules on non-mutual fund target date funds and arrangements to assure that all retirement investors receive the same basic information (see Lawmakers Respond to SEC Proposed Rules for Target-Date Funds).  

While most commenters supported the idea of simplifying disclosures, the Certified Financial Planner Board of Standards, Inc. recommended the SEC go further, including: 

• Requiring funds to identify the average target equity allocation for all target-date funds with the same target-date and disclose the extent to which its target equity allocation differs from the average, and provide a graphical comparison of the average glide path for all target-date funds with the same target-date along with the fund’s stated glide path.   
• Requiring sufficient disclosures to allow investors to know whether the glide path is designed to extend “to” or “through” the target date, including a narrative statement immediately following the required disclosure of the fund’s asset allocation and a table, chart or graph that visually depicts the glide path. 
• Requiring a statement suggesting that investors periodically revisit whether a fund remains an appropriate investment given particular circumstances and needs. 
• Requiring disclosure of whether, and the extent to which, the intended asset allocations can be modified without a shareholder vote. 
• Requiring disclosure of the underlying assumptions used in developing a target-date fund’s glide path, including life expectancy, inflation, savings rate, other investments, additional retirement income, and withdrawal rates in the prospectus and summary prospectus. 

The CFP Board also suggested the SEC conduct focus groups and surveys of investors to assess the effect the proposed disclosures might have on investor behavior, and work with its Office of Investor Education and Advocacy and the DoL to explore more appropriate means of educating investors about target-date funds.  

Comments to the SEC’s proposed rule are posted at http://sec.gov/comments/s7-12-10/s71210.shtml.