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Tuesday, May 28, 2024 | Back issues
Courthouse News Service Courthouse News Service

Target Date Retirement Funds Unclear, Says Firm

WASHINGTON (CN) - Investors in target date funds, which purport to shift asset allocations from aggressive to more conservative as the investor gets closer to retirement, frequently do not understand how the funds really work, according to a survey sponsored by the Securities and Exchange Commission.

Only 36 percent of the survey respondents understood that TDFs do not guarantee income at retirement, according to a report on the survey by marketing firm Siegel & Gale LLC.

Most investors also mistakenly think that TDFs are at their most conservative on the target date listed in their title and that the allocations of assets on that date will exactly correspond to the allocations described in a fund's marketing materials.

The survey was commissioned by the SEC to test if an investor's understanding of TDFs was improved by proposed SEC changes to the advertising and marketing of the funds.

Two years ago, the SEC proposed new disclosure rules that would require each fund that includes the target date in its name to disclose the fund's asset allocation at the target date immediately next to the first use of the fund's name in marketing materials, and require marketing materials for each fund to include graphics depicting the fund's asset allocation over time, together with a statement that would highlight the fund's final asset allocation.

The rules also would require disclosure that some funds use a glide path for making more conservative investments that may extend beyond the date in the fund s title. Fund marketing materials would also have to say that TDFs should not be selected based solely on age or retirement date, that it is not a guaranteed investment, and that the stated asset allocations may be subject to change.

The survey tested a thousand respondents on their general knowledge of TDFs and then, using four sets of sample documents tested their understanding of a made-up fund after they had read materials incorporating the changes mandated by the proposed rule.

The survey found that respondents who reviewed documents containing a graphic depicting the potential change in asset allocations over time and text describing the changes were more likely to understand that the funds are not fixed than those who saw just the graphic or just the text.

Overall, the survey found that investor comprehension improved when both graphics and text were presented compared to just text.

However, investors still had problems understanding the more technical points of TDFs, such as when the funds emphasize capital appreciation over capital maintenance. Older investors and those who already owned TDFs were more knowledgeable about the funds both before and after exposure to the proposed disclosures.

In response to the survey, the SEC is reopening the public comment period on its proposed rules and making the surveyavailable to the public. The SEC will accept comments on the survey and proposed disclosure rules until May 21.

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