SEC Study Suggests More Disclosures Needed For Target-Date Funds

Most American investors mistakenly believe that target-date funds provide guaranteed income in retirement, among other misconceptions of how the instruments work, the SEC found in a recent investor survey.

Fewer than 30% of all survey respondents were able to identify the correct meaning of the year in a target-date fund’s name (answer: the approximate year an investor expects to leave the work force). Also just 30% of respondents knew that the funds do not provide guaranteed income in retirement, according to results of an online survey of 1,000 Americans, conducted in October 2011. The New York-based research firm Siegel & Gale conducted the survey for the SEC.

There may be an opportunity for advisors to better educate their clients, given some of the other survey results. The study found, for example, that just 20% of respondents invested in target-date retirement funds because a broker or investment advisor recommended it.

The regulator is now seeking comments on its investor testing, and will consider the feedback before acting on a proposal to enhance disclosures provided to individual investors using target date funds, the commission announced. Advisors can submit comments to the SEC up to 45 days after publication in the Federal Register.

Under the SEC’s proposal, target-date fund providers would have to prominently disclose the fund’s asset allocation at the target date. The disclosure would have to be adjacent to the fund’s name the first time that it appears in marketing materials.

Those materials would also have to include a table, chart or graph depicting the fund’s asset allocation over time. Also, target-date fund providers would have to advise investors not to select the funds based solely on age or retirement date, explain that they are not guaranteed investments, and that the stated asset allocations may be subject to change.

According to the SEC, 54% of respondents were unaware that separate target-date funds with the same year in their names do not necessarily have the same mix of stocks and bonds at the target date. Among investors who owned target-date funds, half incorrectly answered that the investments of two 2020 target date retirement funds both necessarily reach their most conservative point in 2020.

Overall, 41% of respondents said they invested in target-date retirement funds because they seemed like a safe investment and 40% said they invested to provide diversification among stocks, bonds and other asset classes.

Donna Mitchell writes for Financial Planning.