Investor confusion about target-date funds seems to be the biggest problem. Less than 6% of investors can explain what target-date funds do, despite the fact that more than one-third of investors are contributing to such funds, according to Empire Financial Partners, a distributor of John Hancock products based in Williamsville, N.Y., referencing a July 2009 data from the Journal of Financial Planning. More than 60% incorrectly thought that target-date funds offered a guaranteed return, according to Empire Financial, quoting data from U.S. News & World Report.
The SEC is not alone in its mission. The U.S. Department of Labor and the SEC held a joint hearing on target-date funds in June, and a spokesperson for the DOL's Employee Benefits Security Administration confirmed this month that "the Department of Labor, in consultation with the Securities Exchange Commission, is developing guidance to assist employers and workers better understand the operation, risks and benefits of target date funds."
What will emerge from these efforts and the timing of the rulemaking is not yet clear. No further information is yet available from the DOL, and Shapiro has said only that she has asked SEC staffers to prepare rule recommendations regarding the "marketing" of target date funds. For any rule changes, the SEC's procedure requires notice in the Federal Register and usually 30-60 days for initial public commentary.
Fred Reish, employee benefits specialist at the law firm Reish & Reicher in Los Angeles, said the DOL could potentially do the following:
Create a checklist for fiduciaries for the selection and monitoring of target-date funds.
Create a checklist helping participants make decisions about investing in target-date funds.
Revise the Qualified Default Investment Alternative [QDIA] regulation to require that more information be given in order for a target-date fund to qualify as a QDIA.
-Janet Aschkenasy