Securities and Exchange Commission
On the heels of the turmoil caused by the financial crisis, regulators are proposing new rules governing how target-date funds are named and marketed.
The rules, announced late Wednesday, are part of an effort to provide transparency for investors and guide investment decisions, the Securities and Exchange Commission said.
The SEC's proposals would require an allocation tagline next to a fund's name, stating the proportion of cash, stocks, and bonds in the portfolio, and more detailed disclosure on the types of investments made throughout the life of the fund.
The market turmoil in 2008 revealed many investors' misunderstanding of how target-date funds managed their money. In some cases, investors in funds close to maturity were shocked to discover the high proportion of stocks in their portfolios. For example, Oppenheimer Transition 2010 /quotes/comstock/10r!ottnx (OTTNX 7.47, +0.02, +0.27%) lost 41% in 2008.
The market meltdown showed that target-date funds could lose money and perform in ways investors did not expect, SEC Chairman Mary Shapiro told The Wall Street Journal.
The SEC worried that the retirement year, which is a part of the fund name, led investors to believe the fund's performance depended solely on this factor. While there is one date, risk levels vary widely depending on asset allocation.
The proposals would see target-date fund marketing materials provide more detail on investment mixes through the course of the fund. Both print and electronic brochures would need to include graphics that depict the asset allocation and clearly noting that the mix changes over time.
Disclaimer text would also be revised to realign investor expectations. Marketing materials would have to encourage investors to consider their own risk tolerance and the fact that the fund may be in the red, even at the target date.
"Together these rule amendments are designed to foster investor understanding of target-date funds and reduce the possibility that investor will be confused or misled," Shapiro said in a statement.
The SEC will seek public comment on the amendments for a 60-day period following publication in the Federal Register.
Created in the mid-1990s, target-date funds offer an all-in-one investment choice, letting holders choose an approximate retirement date as the fund automatically changes the mix of cash, stocks, and bonds to more conservative balances as the date approaches.
Since their inception, target-date funds have grown quickly and are a popular choices in 401(k) plans. According to the SEC, assets held in target-date funds total about $270 billion.
Source: www.marketwatch.com
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