SEC to Make Recommendations on 12b-1, Target-Dates: Shapiro

December 4, 2009 ( – Plan sponsors could be looking at some changes on target-date funds next year – and maybe a change in certain mutual fund fees.

Speaking at the Consumer Federation of America 21st Annual Financial Services Conference, Mary Shapiro, Chairman of the Securities and Exchange Commission (SEC) told attendees that she had requested that SEC staff, “early next year, present the Commission its recommendations on target date funds.”  

“The “set it and forget it” slogans of these funds resulted in shocked investors who were on the verge of retirement. It was a wake-up call for investors, employers and regulators, alike,” she said, noting that the SEC had held a joint hearing with the Department of Labor on the subject earlier this year (see Target-Date Hearing Webcast Now Online).

“Since that hearing, our staff has been focused on the marketing materials related to these funds and the use of target dates in fund names. I believe this an area in need of reform for the benefit of America’s retirement investors, and I look forward to completing the work we have started,” Shapiro said.

In the context of protecting individual investors, Shapiro broached the subject of 12b-1 fees, which she described as “fees that are automatically deducted from mutual funds to compensate securities professionals for sales and services provided to mutual fund investors”.   

“The problem”, she said, “is that our investor may have no idea these fees are being deducted or who they are ultimately compensating”.  Then, calling for a “better approach,” she said “When it comes to these fees, there is a need for more fundamental change than merely disclosure reforms and a name change. We must critically rethink how 12b 1 fees are used and whether they continue to be appropriate”. 

By way of explanation, Shapiro said, “For example, do they result in investors overpaying for services or paying for distribution services that they may not even know they are supposed to be getting? This is no small matter. In 2008, these fees amounted to more than $13 billion.” 

She then told attendees that she had asked SEC staff for a recommendation on 12b-1 fees in 2010.  “In 1980, they may have made sense — but after 30 years of growth and change in the mutual fund market, it is past the time to reassess their need and their effectiveness,” she said.