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June 18, 2009 01:00 AM

Regulation of target-date funds debated at hearing

Doug Halonen
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    The Investment Company Institute today argued that any perceived shortcomings in investor awareness on target-date funds would best be addressed through additional disclosure, not new regulation.

    “We are firmly convinced that investor understanding of target-date funds should be enhanced through disclosure and education, rather than through the additional regulation of these funds’ names or holdings,” said Karrie McMillan, ICI general counsel, during a joint hearing by the SEC and Department of Labor.

    But SEC Chairwoman Mary Schapiro said target-date funds are on regulators’ radar screen because 31 target-date funds with 2010 retirement dates posted returns from -3.6% to -41% in 2008.

    “These varying results should cause all of us to pause and consider whether regulatory changes, industry reforms or other revisions are needed,” Ms. Schapiro said.

    Other witnesses at the hearing testified that additional disclosure would not be sufficient to ensure that plan participants understand the risks of investing in target-date funds, which now can have the same retirement date but with widely varying asset allocations.

    Marilyn Capelli Dimitroff, chair of the Certified Financial Planner Board of Standards, urged the SEC to regulate fund names to ensure that funds using the same target dates fall within a reasonable stock-bond allocation range.

    If the SEC doesn’t do that, Ms. Dimitroff said the DOL should consider rescinding target-date funds as a qualified default investment alternative for defined contribution plans.

    “We have serious concerns that these funds are misleading,” she testified.

    David Certner, legislative policy director of AARP, urged the DOL to come up with compliance tools to help plan fiduciaries assess the suitability of asset allocations and glide paths of target-date funds for their plans.

    “We support efforts to ensure that plan sponsors know what key factors to look at when evaluating and selecting target-date funds,” said John Ameriks, principal, The Vanguard Group, in his testimony before the panel.

    Allison Klausner, assistant general counsel-benefits of Honeywell International — who testified on behalf of the American Benefits Council — urged the DOL and SEC to refrain from creating new regulations that would mandate specific features and characteristics for target-date funds.

    “Any regulations should permit plan fiduciaries to make prudent decisions appropriate for its body of plan participants,” she said in an ABC news release on her testimony.

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