The Securities and Exchange Commission Investor Advisory Committee today urged the SEC to expand target-date fund disclosure requirements.

The committee’s recommendations are designed to beef up SEC disclosure rules that were proposed for target-date funds in 2010.

Target-date funds—among the most common investment selections offered employees in defined-contribution plans such as 401(k)s—are mutual funds built around the strategy of scaling down risk leading up to the year that presumably coincides with its investors’ retirement.

The savings vehicles have come under increased scrutiny since 2008, when they suffered massive losses during the nation’s fiscal collapse. Many target-date funds were criticized at the time for holding too many risky equities as they drew close to their target dates—leaving investors’ retirement savings vulnerable to market volatility.

One of the committee’s recommendations is that the SEC implement standards for disclosure of a target-date fund’s so-called glide path—the strategy a fund uses to reduce risk as it approaches its target date.

The committee wants target-date fund prospectuses to disclose the policies and assumptions used to design and manage risk over the life of the fund.
The committee also called on the SEC to require funds to better show how fees will likely affect the savings participants accumulate over the life of the investments

SEC Republican Commissioner Daniel Gallagher said he supports the recommendations and views them as non-controversial.

“The funds are a burgeoning industry, one we need to get a hold of,” he said while sitting in on the session.

Barbara Roper, director of investor protection for the Consumer Federation of America and one of the committee members who developed the proposal, said better disclosures are needed because target-date funds have proved to be significantly riskier investments than originally expected.

She noted the funds are marketed to the least sophisticated investors.

Conservative financial commentator and George W. Bush Institute Executive Director James Glassman said it is important that risk disclosures go beyond descriptions of asset allocation. As an example, he said providing a percentage of bonds in a fund could be deceptive in terms of risk because some bonds are very risky.

Another committee member, AFL-CIO Associate General Counsel Damon Silvers, said target-date fund intermediaries need more structured disclosure than they have in constructing what are often default investments for retirement fund participants.

Over 70 percent of American employers offer target date funds as their default investment option for company-sponsored defined contribution plans. Assets in the funds grew 29 percent last year to near $485 billion. The funds are the fastest growing investment vehicle for small investors.