* Proposed rules require more disclosure for target dates
* Critics say proposed rules do not go far enough
* Target dates most useful for younger investors-adviser
By Helen Kearney
NEW YORK, Jan 26 New regulations proposed by
the Labor Department are supposed to help investors navigate
"target date" mutual funds, but some advisers remain skeptical
about the effectiveness of these popular investments.
The regulations are in response to a public outcry
following huge losses suffered by target date funds during the
financial crisis. But critics say they do little more than
require fund companies to add a few more charts to their
"The regulations are marginally useful, but only to people
who read the fine print, and that's only a small percentage of
investors," said Louis Harvey, president of consulting firm
Target date funds change their asset mix over time with the
aim of becoming more conservative as an investor approaches
retirement. But funds with a "target date" of 2010 lost an
average of 24 percent in 2008, with the worst performer --
Oppenheimer Transition 2010 A -- losing 41 percent, according
In 2008, net new inflows into target date funds dropped to
$43 billion from $58 billion in 2007. In 2009, $45 billion
flowed into target date funds, according to Morningstar.
One of the biggest problems is investor confusion about
what is meant by the "target date." Some funds are designed to
provide a lump sum to investors at the date in the fund's name,
while others are designed to last through the investor's
Under the proposed regulations, fund providers will have to
detail the fund's asset allocation, how it will change over
time and what is meant by the target date.
The comment period on the proposed final regulations ended
on Jan. 14, and final rules are expected later this year.
Some critics say the regulations do not go far enough.
All target-date funds should be required to end on the
target date, rather than continuing through retirement, said
Craig Israelsen, an associate professor at Brigham Young
University. Once the date is reached, the funds should be
transferred to another investment, preferably with the help of
a financial adviser.
"One of the most important pieces of information at
retirement is something a target date fund cannot know -- how
much money does the person have? That will determine how
aggressive they need to be," he said.
Many target date funds, assuming that people have not saved
enough for retirement, continue to be aggressively invested at
the retirement date, which can harm people who have saved
"The person who has saved properly is taken hostage," said
Israelsen. "A default option should never hold people hostage
who have done the right thing."
But Harris Nydick, founding partner of Totowa, New
Jersey-based CFS Investment Advisory Services, thinks target
date funds can be useful for investors but they need a few
Nydick, who advises small and mid-size companies on their
retirement plans, says the funds should indicate in their name
whether they will take investors to or through retirement. He
also recommends that the front cover of a prospectus display a
"nutrition label" showing the makeup of the portfolio today and
how that will change in five, 10 and 15 years.
"Right now the communication begins and ends with four
pounds of paper that people don't read," he said. "If it's
right there in the title, there's no escaping it."
Target date funds are also often used as a "default
investment option" in company retirement plans for employees
who do not actively choose their own investments.
William Suplee, owner of Paoli, Pennsylvania-based
Structured Asset Management Inc, said target-date funds are
better than the old default options such as money market funds
that provided paltry returns. But he says they are too generic
to help anyone but very young investors who are just focused on
"Everyone's circumstances are so different," said Suplee.
"These can't be addressed in a target date fund."
(Reporting by Helen Kearney, editing by Matthew Lewis)