NAPA pushes for clear language on TDFsNews added by Benefits Pro on June 11, 2014

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By Nick Thornton

Target date funds are not guaranteed investment options.

That’s just one of several clear-cut statements the National Association of Plan Advisors Government Affairs Committee suggested that the Securities and Exchange Commission should incorporate in its proposed disclosure rules for target date funds.

NAPA’s Government Affairs Committee wants to see language used that plainly lets investors know that, although some TDFs will automatically de-risk as workers inch towards retirement, there’s no such thing as risk-free investing.

In a letter Monday to the SEC, NAPA noted that, according to a survey of 1,000 plan participants conducted by Alliance Bernstein, 34 percent of respondents thought that balances in TDFs could never go down and another 23 percent did not know if that statement was true or false.

Also read: Fidelity argues ‘through’ glide path is less risky

Moreover, the plan advisor advocacy group wants simple, clear language that spells out that a stated target retirement year is no guarantee that a TDF investor will achieve a successful retirement by that date. The same survey from Alliance Bernstein, it said, found that 37 percent of TDF investors thought that TDFs “guarantee that you will meet your income needs in retirement.”

NAPA wants investors to understand that TDF “manufacturers and managers make a number of informed assumptions when constructing their target date fund portfolio, and their assumptions for the ‘average’ target date fund investor may or may not reflect (the investor’s) own circumstances.”
TDFs have been growing fast in recent years, and most employers nowadays include them as an option for their 401(k) enrollees. TDFs registered with the SEC held $500 billion in assets in 2013, compared to $250 billion in 2010.

A recent Employee Benefits Research Institute/Investment Co. Institute study showed that 41 percent of all 401(k) participants chose TDFs as their primary retirement investment vehicle in 2012. The percentage is even higher (52 percent) for investors in their 20s.

Also read: Most workers bungling use of TDFs

The automatic enrollment of employees in 401(k)s has, in part, driven the trend, as sponsors see TDFs as a safe way to allocate, and reallocate, assets, for those participants who take a passive approach to their self-directed plans.

While many consumer advocates champion TDFs for their capacity to guide workers through complicated allocation questions, others are critical of their fees, their purported lack of diversity and their tendency to encourage investor complacency.

The Labor Department is also soliciting comments – through July 3 – on what the industry might consider the best disclosure guidelines for TDFs.

Phyllis Borzi, assistant secretary for the Employee Benefits Security Administration, said this week that her agency is “taking great care to carefully coordinate with the SEC to ensure that the two agencies do not establish inconsistent disclosure requirements.”

Its proposed amendments, first recommended in 2010, would require marketing materials for TDFs to include a table, chart or graph showing the fund’s asset allocation over time. The SEC’s Investor Advisory Committee has recommended providing its own illustrations as a benchmark to show investors how their assets are automatically reallocated as their retirement date approaches, and the level of risk their allocation strategy carries.

Different TDFs bear different levels of risk relative to their glide paths, and how assets are allocated throughout the savings life of workers. Choosing different assets within an asset class also exposes 401(k) enrollees to various degrees of risk.

The SEC wants to know whether the new disclosures would adequately convey the risks associated with TDFs, and whether the emphasis on asset allocation would cause investors to prioritize investment risk over longevity risk or inflation risk.

The first round of comments was so limited that the SEC felt the need to open its latest round to get a better grasp of the investment industry’s perspective. The extension ended Monday.

Also read: The 6 things you need to know about investing in target funds

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