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WEALTH MANAGER-New US regs may not fix target date funds
January 26, 2011 / 8:01 PM / in 7 years

WEALTH MANAGER-New US regs may not fix target date funds

* 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 (Reuters) - 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 brochures.

“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 Dalbar.

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 to Morningstar.

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 retirement.

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 appropriately.

“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 tweaks.

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 growing assets.

“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)

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