The SEC’s Investor Advisory Committee (the “Committee”) issued a series of recommendations (the “Recommendations”) regarding the SEC’s proposed amendments (the “Proposed Amendments”) to Rule 482 under the Securities Act of 1933 and Rule 34b-1 under the Investment Company Act of 1940 that are designed primarily to provide potential investors with additional information about target date mutual funds (“TDFs”). (The Proposed Amendments were described in the June 29, 2010 Financial Services Alert.)
Findings. The Recommendations opened with the following findings:
- TDFs play an increasingly important role in the retirement savings of American investors.
- Well-designed TDFs can provide a cost-effective long-term investing solution for the many individual investors who find it difficult to construct and maintain a diversified portfolio with risk levels changing to match their evolving needs.
- The dramatic drop in value in 2008 of some TDFs that were close to reaching their advertised target date brought new attention to the significant differences in risk levels that exist among funds with identical target dates.
- Evidence suggests that individual investors are ill-equipped to identify risk disparities among similar seeming funds (including TDFs).
- Many professional pension fund consultants under-estimate the degree of risk in many TDFs.
- There is a high degree of concentration among just a few TDFs with the top three fund families having 75 percent of the market share in 2011, and the top ten fund families having 90 percent of the 2011 market share.
The findings include citations to (1) a third-party study sponsored by the SEC regarding investors’ understanding of TDFs and advertisements for TDFs, which was discussed in the March 13, 2012 Financial Services Alert and (2) a study prepared by the staff of the SEC’s Office of Investor Education and Advocacy regarding retail investor financial literacy, which was discussed in the September 11, 2012 Financial Services Alert.
Recommendations. In broad terms, the Committee recommended that the SEC revise the Proposed Amendments to improve the marketing materials regarding TDFs provided to investors. The Committee also recommended that the SEC act to ensure that retirement plan consultants receive appropriate information to aid them in deciding which TDFs are included as retirement plan options and offered as default investments. The Committee also made the following specific recommendations (each accompanied by a supporting rationale):
- The SEC should develop a glide path illustration for TDFs that is based on a standardized measure of fund risk as either a replacement for or supplement to the asset allocation glide path illustration that is included in the Proposed Amendments.
- The SEC should adopt a standard methodology or methodologies to be used in both the risk-based and asset allocation glide path illustrations for TDFs.
- The SEC should require TDF prospectuses to disclose and clearly explain the policies and assumptions used to design and manage TDFs to attain the target risk level over the life of the TDF.
- The Committee strongly supports the Commission proposal to require TDF marketing materials to include a warning that the fund is not guaranteed and that losses are possible, including at or after the target date; however, the Committee recommended that the SEC consider testing various approaches to providing this disclosure to determine the most effective approach and then mandate that approach in the final rule.
- The SEC should amend the fee disclosure requirements for TDFs to provide better information about the likely impact of fund fees on total accumulations over the expected holding period of the investment.
SEC Action on the Proposed Amendments. The comment period for the Proposed Amendments ended almost a year ago, on May 21, 2012. The SEC has taken no further action on the Proposed Amendments in the interim.