No headaches for defined contribution plans from SEC's proposed target-date rules

Newly proposed regulations by the Securities and Exchange Commission on the marketing and advertising of target-date funds don't appear to portend problems for the defined contribution industry, according to interviews with several major players in the DC universe.

The proposed regulations shouldn't create too much regulatory, fiduciary or financial stress, experts said following an initial review of the SEC rules issued in mid-June. However, they added that the SEC must make sure the final rules avoid micro-managing the industry for fear of confusing participants or handcuffing sponsors and providers.

“The SEC has to walk a fine line between giving participants good information and giving information that they can't interpret or can't understand,” said Lori Lucas, executive vice president and defined contribution practice leader for Callan Associates Inc., San Francisco. “I think the SEC understands the need for informing people without overburdening them.”

The SEC “did a good job of requiring disclosure without going overboard,” added Jan Jacobson, senior counsel for retirement policy for the American Benefits Council, Washington.

Based on an early examination of the SEC proposals as well as conversations with several members of her association, “our preliminary response is that I think from a plan sponsor perspective. they'll be happy,” Ms. Jacobson said. “Service providers were expecting something. They may not necessarily be happy with the requirements, but they don't feel that it's going too far.”

The ink is barely dry on the 101 pages of fine print that include and accompany the proposals. The SEC is seeking public comments through Aug. 23, and trade associations say they will be filing detailed responses.

(Click http://sec.gov/rules/proposed/2010/33-9126.pdf for the proposal.)

In an e-mail response to questions about the proposed changes, Edward Moslander, senior managing director for institutional development at TIAA-CREF, said: “While it will add some cost, it will have a positive impact on the industry by increasing trust among plan sponsors and participants.

“Based on a preliminary review, I don't see anything in the proposed rule that is particularly alarming for the employer community,” Edward Ferrigno, vice president of Washington affairs for the Profit Sharing/401k Council of America, Chicago, said in an e-mail.

The proposed rules should help the investor or the plan sponsor who “is not already aware of the structure, goals, and risks of target date funds,” he wrote. “It's interesting that the SEC noted that the vast majority of target date funds already provide much of the information they are proposing.”

The SEC recommends, among other things, that marketing information for a target-date fund that includes the target-date in its name must describe the asset allocation of various types of investments — equity securities, fixed-income securities and cash.

The SEC also wants marketing materials to disclose a target-date fund's percentage allocation to equity securities, rather than just to equity funds.

Several DC experts said the SEC should avoid making too many specific requirements. “Regulation has to be flexible and dynamic,” Ms. Lucas said. “If you make it too prescriptive, that's a cause for concern.”

She urged caution in the asset-allocation recommendations, noting that although many 2010 target date funds were criticized for their 2008 performance due to high concentration of equities, some of those funds were hurt by poorly performing fixed-income components.

Ms. Jacobson of the American Benefits Council said the SEC would be “going overboard” if a final regulation imposed specific allocation percentages for specific target-date years.

Other SEC proposed rules include:

• Requiring print or electronically-delivered marketing materials to include a “prominent” table, chart or graph that “clearly depicts the asset allocations among types of investment over the entire life of the fund.” The materials would have to show how the allocation changes over time and illustrate the glide path.

• Including a statement telling the investor to consider “risk tolerance, personal circumstances and complete financial situation,” and pointing out that a target-date fund is not a guaranteed investment.

• Making changes to the SEC's anti-fraud guidance on misleading marketing claims. Suspect marketing claims place an emphasis on a single factor such as age or tax bracket “as the basis for determining that an investment is appropriate,” the SEC said. It warned of marketing materials that say investing in target-date funds “is a simple investment plan or (one) that requires little or no monitoring.” This proposal rule will apply to all investments – not just target-date funds.

Some industry players wondered if the SEC proposals could produce the unintended effect of making target-date funds appear more complex to participants than the industry's sales pitch of simplicity.

“The more complicated the regulations, perhaps the less likely it will be to get the point across to participants,” said Ms. Jacobson. The SEC proposals “seem contrary to a set-it-and-forget-it kind of presentation.”

Richard A. Davies, senior managing director for defined contribution services at AllianceBernstein LP, New York, said “the simplicity of target-date funds is one of the benefits of product design.” Although the propose rules wouldn't require much modification to his firm's target-date fund marketing, he wondered: “Would extra disclosure confuse participants and lead them away from target-date funds?”