New Rules for Target-Date Retirement Funds


The Securities and Exchange Commission (SEC) has introduced new rules to help investors figure out how target-date funds in their 401(k) and other retirement accounts are supposed to hit their targets.

Target-date funds are hugely popular with assets growing from $15 billion in 2002 to almost $270 billion today. But many got pummeled in the 2008 market downturn.

So now, the SEC seems to be taking a cue from Senator Herb Kohl (D-Wisconsin), the chair of the Special Senate Committee on Aging, who has been calling for target-date funds—one of the most popular 401(k) options—to be more clearly defined.

"Targeting these target-date funds for oversight and regulation is something that needs to be done," said Kohl, "so that we don't have accidental huge losses in people's funds that are in target-date funds."

Target-date, or life-cycle funds, are designed to reallocate between stocks and bonds automatically to make your investments less risky as you approach retirement. But target funds don't always aim in the same direction.

In 2008, the benchmark S&P Target Date 2010 Index fell 17 percent, but an Oppenheimer2010 fund dropped 42 percent; AllianceBernstein and T. Rowe Price had target-date funds that were down more than 25 percent. Others, however, fared much better.

Kohl's office found equity allocations in these 2010 target-date funds ranged from 26 percent to 75 percent, which produced a huge divergence in returns.

To help fix these funds, Kohl has drafted legislation that threatens litigation against investment companies. With the government looking into target funds, some companies have already made it easier to understand what's in their target-date funds—and it has simplified their fees.

"Just the mere fact that we're calling hearings on these things has awakened people in that industry to be sure that they're doing as good as they possibly can to manage people's money," said Kohl.

But the SEC's proposed rules may not be enough to satisfy everyone: Some analysts want the funds to carry risk labels in plain English—such as, "aggressive," "moderate," "conservative"—right along with the fund name.

The mere threat of litigation appears to have produced some results. Oppenheimer and Putnamare among the companies that have already clarified the asset-allocation plans and fee structures of their target-date funds.