An article in today’s Wall Street Journal entitled SEC Takes On Target-Date Funds, discusses the SEC’s efforts to improve disclosures made in these popular investments.
What are Target-Date Funds?
Like most mutual funds, Target-Date Funds invest in a mix stocks and fixed income investments. What makes these mutual funds different is that the percentage of asset classes change over time as the fund approaches a target date. For example, if you plan to retire in 20 years and live off of the income from your investments, you could invest in one of these funds with a target date of 2029. At the beginning of your investment period, the fund would be heavily weighted in stocks as opposed to the fixed income investments. As you approached the 20 years target date, the fund would become more heavily weighted in fixed income investments. Because of this shift over time towards a more fixed income-centric, the fund presumably becomes more conservative and income- oriented as you approach retirement. This shift in asset allocation is commonly known in the securities industry as a “glide path.”
Why is the SEC scrutinizing these funds?
As with most securities related problems, it usually boils down to poor returns and poor disclosure. According to the Wall Street Journal article, the average loss in 2008 among 31 funds with a 2010 retirement date was almost 25%. One of the issues that the SEC is considering is whether the use of a particular target date in fund’s name is misleading. It is plausible that investors could construe a target date as some sort of guarantee about future results.
Also, disclosures about the “glide path” methodology that a fund manager uses to shift asset allocations over time are based on assumptions that may not conform to an individual investor’s real life circumstances. These assumptions are not always adequately explained in the prospectus. As a result, the investments may not be suitable for a particular investor’s financial needs.
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The Doss Firm, LLC is an Atlanta-based law firm devoted to protecting the rights of consumers/investors against the financial services industry. For more information about our firm, pleae visit our website at www.dossfirm.com.
Jason Doss is the owner of The Doss Firm, LLC, an Atlanta-based law firm devoted to representing consumers across the country in a variety of areas including investment disputes and consumer class action litigation. Mr. Doss earned his J.D. from Florida State University in 2002 and his B.A. from the University of Florida in 1997.