Alert March 13, 2012

SEC Releases Results of Study of Investor Comprehension of Target Date Fund Disclosure

The SEC released the results of a third-party study that it sponsored regarding investors’ understanding of target date retirement funds (“TDFs”) and related advertisements (the “Study”).  This article presents a high-level overview of the 96-page study.

Methodology. The Study was conducted through an online survey of 1,000 investors that currently hold investments in retirement accounts (the “Investors”), approximately half of whom currently own TDFs.  The Study was conducted in three parts, in which each Investor (i) answered questions about the Investor’s background knowledge of TDFs, (ii) answered questions about the Investor’s use, comprehension and perceptions of TDFs, and (iii) reviewed one of four variations of a TDF disclosure document and responded to questions testing the Investor’s understanding of the disclosure.

Key Findings. The Study found that Investors generally have misconceptions about how TDFs operate, including: (i) a lack of understanding of the point at which the asset allocation of a TDF stops changing, (ii) a failure to understand that TDFs do not provide guaranteed retirement income, and (iii) a failure to understand that TDFs with the same year in their names do not necessarily have the same mix of assets when they reach their target date.  Additionally, the Study determined that: (i) Investors who own TDFs have fewer misconceptions about them, (ii) fewer than half of all Investors understood the correct meaning of the year in a TDF’s name or that a TDF does not provide guaranteed income during retirement, and (iii) Investors that are closer to retirement age have the highest understanding of TDFs.

Testing of Specific Disclosure Elements. Each Investor was presented with one of four variations of a disclosure document to review that contained either: (i) a “tagline disclosure” showing the TDF’s asset allocation at the target date, (ii) a “glide path illustration” showing the percentage asset allocations over time, (iii) both the “tagline disclosure” and the “glide path illustration,” or (iv) neither the “tagline disclosure” nor the “glide path illustration.”  The Study found that which of the four disclosure variations was presented to an Investor affected the Investor’s understanding of the TDF.  Among other things, the Study determined that Investors presented with a disclosure document containing the “tagline illustration” showed a higher rate of comprehension of the asset allocation mix of the TDF at the target date, while Investors presented a disclosure document containing the “glidepath disclosure” showed an increased understanding of how the asset allocation mix of the TDF changes over time and that it will change following the target date.  Additionally, Investors receiving a disclosure document with neither the “tagline disclosure” nor the “glide path disclosure” exhibited the highest rate of understanding that TDFs do not guarantee the original investment.  The Study found that after reviewing any of the disclosure documents, a majority of Investors understood that a TDF can lose money after the target date and that the invested amount is not guaranteed. 

The SEC has made the Study part of the comment file for its proposal on TDF disclosure (as discussed in the June 29, 2010 Financial Services Alert).