CFP Board Proposes Establishing Industry Standards for Target Date Funds

WASHINGTON, D.C., June 19, 2009 — Certified Financial Planner Board of Standards, Inc. Chair Marilyn Capelli Dimitroff, CFP® outlined CFP Board’s proposals to enhance consumer safeguards for investors who use target date funds, in testimony before a joint Securities and Exchange Commission-Department of Labor hearing.

“Target date funds, appropriately managed, can be beneficial to investors. However, we have serious concerns that these funds are fundamentally misleading to investors because they are allowed to be managed in ways that are inconsistent with reasonable expectations that are created by titles used on the funds,” Dimitroff said.

Dimitroff told the panel that the SEC should amend Rule 35d-1 (the Investment Company Names rule), to include target date funds. She also recommended that the Department of Labor work with the SEC to establish industry-wide standards to stipulate an appropriate range of asset allocations for each date reflected in a target date fund.

Target date funds are investment vehicles that allocate their investments among various asset classes and automatically shift that allocation to more conservative investments as a “target” date approaches. This shift in asset allocation can vary significantly among funds using the same target date. In recent years, target date funds have grown increasingly popular in employer-sponsored retirement plans.

Noting that the use of a date in a target fund’s name carries with it an expectation that the fund would invest in a mix of investments appropriate for someone retiring, or nearing retirement, in the year signified by the name, Dimitroff told the panel that in 2008, the performance of target date mutual funds with 2010 in their name, had losses ranging from 3.6 percent to 41 percent.

“We believe that a loss of up to 41% of assets from a fund labeled 2010 is completely inconsistent with an investor’s reasonable expectation that his or her assets would not be subject to such high market volatility,” Dimitroff said. “It is not an answer to say that misleading fund names can be cured with effective disclosures. We must face the reality that disclosures are very often not read and more often not fully understood. Disclosures are simply not adequate to counteract the reasonable expectations created by a fund’s name,” she told the hearing.

“For these reasons, we recommend that the SEC amend its misleading names rule to provide that a target date fund’s name is a materially deceptive and misleading name unless the fund’s investments fall within an acceptable range of asset allocations consistent with its name,” she said.

Dimitroff went on to say that establishing industry standards for target date funds is especially important because target date funds are often the default investments for many individuals who enroll in 401(k) plans. “Appropriate ranges of asset allocations for target dates, based on reasonably accepted industry practices, can and should be established.” CFP Board has pointed to the Thrift Savings Plan Lifecycle Funds established for federal employees and members of the armed services as an example of the feasibility of setting reasonable industry standards for asset allocation in funds with specific time horizons.

“We urge the Department of Labor to work closely with the SEC to establish industry standards that will ensure target date funds are not misleading to consumers on either extreme – too much cash for the young investor or too much equity for the investor nearing retirement.” Dimitroff proposed that industry standards for ranges of appropriate asset allocations for target dates could be identified and established by a panel of experts in retirement fund allocations, including practicing financial planners who hold CFP® certification.

If efforts to put such standards into place are not undertaken or not effective, the Department should proceed on its own to regulate target date funds that are used in 401(k) plans, or, repeal such funds’ eligibility as qualified default investment alternatives in employer sponsored retirement plans, Dimitroff said.

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