In the last Retirement blog, we posted that the SEC and DOL were set to hold a hearing evaluating target date funds on June 18th. While there were many who surmised a potential and seismic shift in the retirement world, what came out of the hearing was much more subdued. The hearing consisted of nine panels, over 40 witnesses and multiple testimonies. As Rebecca Moore of planadviser.com stated, the most common theme of the day was that “target dates are useful, but flawed”.
Target date funds are viable options for plan participants with limited time to research plan fund options or limited investment knowledge to select individual funds. Target date funds offer a simpler solution of using a glide-path asset allocation strategy which matches up to the participant’s target retirement date. However, the hearing showed that is much more difficult in practice. Joseph C. Nagengast, of Target-date Analytics said, “There is some theoretical rationale for employing a glide path throughout the accumulation phase. No credible rationale has ever been proffered for using a glide path in the distribution phase”. However one point was made clear, there should be no regulations on how one invests in target date funds. “In the 70-year history of mutual fund regulation, the government has never regulated the investment choices of mutual funds. Nor should it start now,” said ICI General Counsel Karrie McMillan. The largest fear of placing restrictions on investment choices for target date funds is that it would cripple the fund manager’s ability to rebound from losses, as well as hinder the fund’s long term objectives.
While the hearing did touch on what’s wrong, many testimonials did mention ways to help improve target date funds. Nagengast suggested a need to focus on “the name of each fund (that) must bear some relationship to the way the fund is managed, that is, its glide path” and how “the glide path must be designed to provide for a predominance of asset preservation as the target nears and arrives”. Other suggestions include disqualifying target date funds as a Qualified Default Investment Alternative, offering full disclosure, education programs, and education targeting soon-to-be retiree programs. In the end, the DOL and SEC will gather all the data to try and address any future regulations. However, by the sound of it, what was once thought as a doomsday event for target date funds, now seems to be much-ado-about-nothing.
For more information:
Missing the Targets by Steven Syre (Source)
Financial Planners urge Fedl Standard for Target Date Funds by Darrell A Hughes (Source)
U.S. Urged not to Tamper with Target Date Funds by James Pethokoukis (Source)
Target-Dates Useful but Flawed, Witness Tell SEC and DoL by Rebecca Moore (Source)
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