Regulators Target Target-Date Funds; Mandatory Glidepath Could Lower Risk.(Mutual Funds)

Byline: John Morgan

Regulatory leaders are questioning whether changes need to be made to target-date funds after several 2010 funds reported huge losses last year, but mutual fund industry leaders say these concerns are overblown.

Industry leaders agree that target-date funds, also known as lifecycle funds, should become increasingly conservative as they approach their target date, but disagree on how conservative the funds should be, and whether or not a glidepath should continue past the target date. Many investors are not aware of this discrepancy and might incorrectly assume their fund has a much different asset allocation than it really does.

An investor in a 2010 target-date fund might expect the fund to be very conservative, but many of the funds are designed to maintain a heavy exposure to equities well past the retirement date. These riskier glidepaths obviously backfired in 2008.

"There is a misperception that if I have two target-date funds with the same name, they have the same equity exposures," said Marie Swartzwelder, vice president of investment strategy at Prudential Retirement. "We need to find a way to get glidepaths to reflect not only the participant's age but their risk tolerance, but we don't want glidepaths legislated to us."

"We strongly oppose any efforts to regulate the glidepaths or other aspects of the investment design or construction of target-date funds," said John Ameriks, a principal with The Vanguard Group.

At a hearing of the Securities and Exchange Commission and the Department of Labor on target-date funds earlier this month, regulatory leaders questioned industry experts on the role the funds play in retirement accounts, the funds' performance during the last year and what changes can be made to the funds, if any, to better serve investors.