Lawmakers Respond to SEC Proposed Rules for Target-Date Funds
In the letter, Senator Tom Harkin (D-Iowa), Chairman of the Health, Education, Labor and Pensions Committee; HELP Committee Ranking Member Michael Enzi (R-Wyoming); and Aging Committee Chairman Herb Kohl (D-Wisconsin) commended the SEC for addressing issues relating to target-date funds, but recommended that the SEC both broaden the application of the rule to non-mutual funds and require the inclusion of additional disclosures in marketing materials. Additionally, they urged the SEC, together with the Department of Labor, to remind plan fiduciaries of their duty to prudently select and monitor target-date funds offered to participants in defined contribution pension plans.
“We are deeply concerned about the limited scope of the proposed rule,” the letter said. The disclosures required by the proposed rule would only be effective with respect to mutual funds (see SEC Releases Target-Date Fund Disclosure Proposal), but the lawmakers noted not all target-date funds are mutual funds. They encouraged the SEC to find ways to expand the application of the proposed disclosure requirements, within its authority, to all target-date funds being offered to defined contribution plans. “To the extent the SEC lacks jurisdiction, we encourage the SEC to work closely with the DoL, which has broad authority to regulate the use of pension plan assets and the services provided to plans, and other appropriate regulators,” the letter said.
The Senators suggested broadening the scope of the disclosures required in marketing materials to include a clear statement – written in a manner calculated to be understood by the average investor – explaining the following:
- the age group for whom the fund is designed;
- the relevance of the date used in the fund’s name;
- the fund’s assumptions about the investor’s withdrawal intentions after reaching the target date;
- the rationale behind the glide path used in the target-date fund; and
- whether the target-date fund is intended to be a fund of funds and, if so, whether any of the underlying funds are affiliated with the target-date fund’s manager.
“Clear, prominent disclosure of such information is necessary to ensure that those investing in target-date funds can easily understand the nature of the investment and are not confused by the fund’s name,” according to the lawmakers.
The letter noted that in the proposed regulation, the SEC requested comments on the use of tables, charts or graphs, and a related narrative disclosure to help assist investors and retirement plan participants/workers to better understand the investment composition of specific target-date funds. The Senators said they support the use of graphs, along with an accompanying statement or narrative, in a prominent place in target-date advertisements; however, the graphs should not contain so much information that it will confuse investors but should contain information concerning the investment composition at the starting date, the target date, and the final allocation in retirement.
They also said the graphs should be presented in a way to allow greater comparison of target-dates funds within a family of funds of an investment manager as well as comparison with other target-date funds on the market.
The lawmakers suggested the SEC and DoL carefully consider whether there are asset allocation models or glide paths that should be prohibited per se because they are always inappropriate or are inappropriate for default investments in defined contribution plans. The letter said further study also may reveal a need for greater oversight of conflicts of interest or self-dealing, which may arise where, for example, a manager includes a poorly performing proprietary fund in a target-date portfolio to boost assets or garner additional fees.Public comments about the SEC’s proposed rule can be found at http://sec.gov/comments/s7-12-10/s71210.shtml.
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