A Stern Warning From the SEC - Just in Time

In a recent address at the Mutual Fund Directors Forum Ninth Annual Policy Conference, Mary Shapiro, SEC Chairperson announced her problems with target date funds. As you know from previous posts here, at the previous address of this blog, on my website and on our retirement blog, these funds are not as yet advisable alternatives to a portfolio built on your own. And even if the temptation to allow these types of funds, which in short look to some far-off future date that you pick for your retirement and readjust your risk and holdings to make sure that you grow increasingly conservative with your investment dollar, turn out to be what they sy they will do, there are far too many issues right now.

In her address to these fund managers, the much tougher than the previous eight years of SEC chairpersons told them of her concerns. She said: "Growth in target date fund assets is likely to continue since these funds can be default investments in 401(k) retirement plans under the Pension Protection Act of 2006. More than 60 percent of employers now use target date funds as a default contribution option, compared with just 5 percent in 2005.

"However, target date funds have produced some troubling investment results. The average loss in 2008 among 31 funds with a 2010 retirement date was almost 25 percent. In addition, varying strategies among these funds produced widely varying results. Returns of 2010 target date funds ranged from minus 3.6% to minus 41 percent."

This single acknowledgment should send alarms ringing throughout the mutual fund world. No longer is business as usual, I'll-turn-my-head-and-let-you-do-what-you-want-to type of enforcement. No longer is this simply the wishes of Wall Street over the fiduciary responsibility of those managers, who lobbied mightily for the Pension Protection Act of 2006, which more or less mandates the use of these funds.

She offered a clear cut objective instead for her agency "that SEC staff is closely reviewing target date funds’ disclosure about their glide paths and asset allocations. The staff also is examining whether the same target date funds underlie both retirement and college savings plans. The staff has been working closely with the Department of Labor in light of target date funds’ prevalence in participant-directed retirement funds. This important issue has also been an area of focus for Chairman Kohl and the Senate Special Committee on Aging."

As I have mentioned before, many of these funds lack clear transparency of just how they plan on achieving their promised results. I have accused the industry of dumping orphan and unwanted funds into the portfolio of these funds to keep some investor's money on the table while sacrificing others in the process. The fees are still much higher than they need to be. Ideally, they should be closer to the index level, charge no 12b-1 fees, and offer more succinct projections of what is to come. Mae West once suggested that “An ounce of performance is worth pounds of promises.” Ms. Shapiro, to her credit wants more.

Her final warning: "While you do your part, we at the SEC will do ours. We will consider whether additional measures are needed to better align target date funds’ glide paths and asset allocations with investor expectations. Among other issues, we will consider whether the use of a particular target date in a fund’s name may be misleading or confusing to investors and whether there are additional controls the SEC should impose to govern the use of a target date in a fund’s name. As we pursue this analysis, we will have a special focus on the expectations of the millions of everyday Americans who use target date funds to invest for retirement and educational needs."

Good luck Ms. Shapiro but I believe the wind is at your back on this one.