Are Target-Date Retirement Funds Confusing Investors?

by Wall Street Fraud on April 12, 2012

According to a new study, investors have a lot of misconceptions about target-date retirement funds. In light of the finding, the Securities and Exchange Commission is seeking comment on a proposal it issued in 2010 intended to enhance the information provided to individuals regarding such funds.

Target-date funds are designed to be long-term investments for individuals with particular retirement dates in mind, i.e. 2030 or 2045. They often contain a mix of stocks, bonds, and other investments, and the percentages of each gradually shifts as the retirement date approaches. However, these funds do not guarantee that you will have sufficient retirement income at the target date, and, like all investment products, you can lose money.

Below are some of the misconceptions about target-date funds revealed by the SEC sponsored TDF study:

  • Overall, many survey respondents have some misconceptions about the point at which the asset allocation of a TDF stops changing.
  • Many respondents believed that the target date is the point at which the fund is at its most conservative allocation and that the allocation stops changing thereafter.
  • Understanding that the allocation continues to change after the target date was greater among those who viewed the two documents containing the glide path illustration than among those who viewed the two documents that did not contain the glide path illustration.
  • Only 36% of respondents correctly indicated a TDF does not provide guaranteed income in retirement.

To address these areas of confusion, the proposed rule would generally require target date retirement funds to more prominently disclose the fund's asset allocation at the target date. Under the proposal, the disclosure would have to be placed adjacent to the fund's name the first time the name appears in marketing materials. The proposal also would require marketing materials for target date retirement funds to include a table, chart, or graph depicting the fund's asset allocation over time.

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