That's all fine. But the SEC's proposed changes mistake more information for truly good information. Nothing in the added disclosures provides any real context or explanation that would actually help investors figure out if the final allocation on the target date is appropriate for them. Most disappointing is that the SEC didn't specifically come out with a mandate requiring a clear explanation of whether a target fund is being managed to get the shareholder To retirement, or all the way Through retirement. Unless you've been in a retirement planning cave you know that increased longevity means the time between To (when you retire) and Through (how long you will live in retirement) can be 20 or 30 years. A target date fund that manages To retirement is obviously going to have a lower stock allocation than a target fund that manages Through retirement. That doesn't make one better or worse. It makes them two completely different animals. Too bad a clear explanation of that isn't part of the new rules.
I'm already on the record that that target funds, do 401(k) participants a hell of a lot more good, than harm. Yes, a few outlier 2010 target funds with very aggressive allocations grabbed plenty of headlines during the '08 market implosion, but those were the aberrations, not the norm. John Ameriks, head of Vanguard's Investment Counseling & Research group drove this home recently with the chart shown below that shows on an asset-weighted basis how target date funds have performed for the past three years (to March 31, 2010.)
On an asset-weighted basis, the vast majority delivered returns totally in sync with their stated target dates. Those closer to their target date typically performed better (owing to a higher stake in bonds and cash during the tumultuous stretch) than those with a more distant retirement date (owing to their higher equity allocation.) See the little teeny dots at the bottom of each tranche? Those are the outliers.
The SEC's proposed new rules are tailor made to shine a light on outliers with aggressive allocations. As I said, that's fine. But it seems like a squandered opportunity to focus so much on the risk presented by a few funds and not address other more important areas that would help all target fund investors (or all investors period) invest smarter. In fact, the SEC's 100+ page target fund proposal includes a series of questions seeking further comment. One jumped out at me:
What are the potential consequences for investors if they were to place too much emphasis on investment risk at the target date without giving appropriate consideration to longevity, inflation, or other risks? Is additional disclosure necessary to aid investors' evaluation of longevity, inflation, or other risks?If your goal is to provide information that helps investors invest smarter, seems to me longevity and inflation risk indeed should be part of the conversation. You can weigh in by sending a comment to the SEC.
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