A target-date fund is a
mutual fund that automatically adjusts the portfolio's mix of stocks, bonds, and
cash equivalents according to a selected time frame chosen by the investor.
The name of the fund often reflects the investor's planned retirement
year (i.e. the Fidelity Freedom Fund 2020). As the retirement year approaches,
asset allocation is supposed to reflect a more conservative investment strategy.
Target-date funds are often viewed as simple investment strategies for
average investors who may not have the knowledge necessary to adjust their
retirement portfolios throughout the years. This has led target-date funds
to become the central component of many Americans' 401(K) plans; a
development Congress originally agreed with when, several years ago, it
granted its approval for the funds to become a default investment option
in many company 401(k) plans.
The problem with the funds, according to a July 6 WSJ article by Tom Lauricella,
was highlighted in late 2008 when vast differences in returns appeared
between funds with the same retirement year. The differences in the funds'
rates of return spurred doubts that investors understood that different
funds with the same goal date could carry significantly different levels of risk.
In 2009, target-date funds became the subject of a Senate investigation
and two government hearings, in which officials asked a number of questions
including whether the funds were a) too risky and b) regulated appropriately,
according to an April 9, 2010 New York Times article. Questions were also
raised about how well investors understood the nature of the funds and
the fees associated with them.
The SEC's proposal is to mandate greater disclosure of how the assets
would be allocated in the target year. According to Lauricella's WSJ
article, the new disclosures would do little to clear up confusion, because
investors likely would not understand that two funds with the same asset
allocation (i.e. 50% stocks) could still carry very different levels of
risk depending on the particular stocks owned.
The SEC has sought comments on its proposal and has yet to make a final decision.