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The Securities and Exchange Commission voted 5-0 on June 16, 2010 to subject target date fund offerings to new disclosure requirements, aiming to improve the product transparency and knowledge of individual investors. Let’s look at the disclosure highlights as well as additional media and industry coverage.

Highlights of the disclosure requirements:

The following proposed disclosure requirements, impacting Securities Act rules 156 and 482 and Investment Company Act rule 34b-1, can be adopted after a 60 day public comment period. The public comment period provides for revision of the following based on feedback received by the SEC:

Fund Name and Target Date Asset Allocation

• If the fund name includes target year, the name would also have to be amended to include an allocation tagline, stating the fund’s planned asset allocation at the target date.
• The the fund’s asset allocation at the chosen target date for the fund will also have to be explained, helping investors determine whether the glide-path is appropriate for their expected retirement year or 20 to 30 years of living beyond the date of anticipated retirement.

Asset Allocation Table, Chart, or Graph

• 

  Target-date funds’ marketing materials, whether electronic or in print, would have to include a graphic which depicts how the asset allocation, or glide-path, changes over the life of the fund. Accompanying the graphic would require an explanation that the asset allocation changes over time, when the changes are expected to occur and state the the allocation will not be static.

Risks and Considerations

• The marketing materials also would have to include a statement telling prospective investors that they should consider their financial situation and tolerance for risk before going into a fund, and that it is possible to lose money investing in the fund, including at and after the target date.

Antifraud Guidance

• Marketing materials will have to include an explanation of the potential that securities of an investment company are an appropriate investment could be misleading due to emphasis places on a single factor, such as age or tax bracket.

Additional media and industry coverage:

- Pension & Investments: SEC issues target-date fund proposals

- Investment News: Target date fund disclosure plan falls short of the mark, say critics

- US News and World Report Money: Why Critics Are Still Skeptical About Target-Date Funds

- Speeches by Commissioners announcing the proposed disclosure requirements:

SEC Commissioner Luis A. Aguilar: Combating Investors Misperceptions By Requiring Higher-Quality Disclosure

SEC Chairman Mary L. Schapiro: Opening Statement at Commission Open Meeting

What do you think about the SEC’s proposed requirements? Are they a good thing?