On June 18th, the Employee Benefits Security Administration and the SEC will hold a one day hearing that focuses on target date funds. According to the agency, “the hearing will focus generally on issues facing investors in these types of products, and will explore topics such as portfolio composition, risk, and disclosure.”
The hearing is partly a response to the performance of the 2000 – 2010 target date funds. As of 3/31/09, the average 1 year performance for 2000 – 2010 target date funds was down 24.67%. In theory, the composition of the funds should be more conservative the closer to the target retirement date. This hearing will address how and why target date funds have such high average negative returns.
In addition, the hearing is also a follow up from last February where the Department of Labor issued a regulation from last year that allowed target date funds to be used as the qualified default investment option (QDIA) for plans. However, the hearing did not address any “requirements regarding the composition of target-date funds and the appropriate ratio of stocks and bonds as the fund nears its target”. What is to stop a manager from investing 80% in equities and only 20% in bonds for a 2010 target date fund? Hopefully what comes out from the hearings are guidelines for plan sponsors to review their target date funds and see if they fit the plan’s goals.
For more information, please go to http://www.planadviser.com/compliance/article.php/4333
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