Morningstar: Not enough disclosure in target date disclosure

Morningstar Inc. urged the Securities and Exchange Commission to give retirement plan participants more information on the target date funds available in their 401(k)s. A May 18 comment letter asked the regulator to rethink its approach on target date fund disclosure. Morningstar wants the commission to use graphs that depict a given fund's changing asset allocation over time. Currently, plan participants only see what the asset allocation of a fund will be at the target date. Though the SEC originally proposed guidelines for target date fund disclosures in June 2010, the commission reopened the comment period on its proposed rule this April. “The target-year-allocation disclosure could be confusing,” said Morningstar's letter, which was authored by a group of fund researchers, including Thomas Idzorek, global chief investment officer at Morningstar's investment management division. Since most retirement plans offer only one target date series, every fund in a given series that precedes its target date will have the same asset allocation at the target date, the fund analysts wrote in their letter. Morningstar is backing, among other things, charts that depict glide paths. “Glide path illustrations are a useful way to explain target date funds to investors,” wrote Morningstar's team. “But those who are choosing a target date series for a retirement plan — advisers, consultants and plan sponsors — need additional detail to fully assess the series' potential risks and returns.” Tables spelling out different asset classes and their weighting through the life of a given target date fund could also accompany the graphics. For instance, a chart could show the numerical weighting toward different categories of equities, fixed income and commodities, and the way that exposure shifts from 40 years before retirement to ten years after retirement, according to the letter. Some of the firm's analysts suggested that fund series that employ tactical asset allocation, which shift equity exposure during periods of high volatility, use a disclosure to describe how that exposure can change. “As a result of these tactical allocations, the fund may deviate from its strategic target allocation at any given time by up to +/-15% for fixed income, +/-10% for equity and +/-20% for money market/cash and cash equivalents,” the Morningstar letter noted. SEC spokeswoman Florence Harmon declined to comment on Morningstar's letter. Experts at the fund research firm also commented on whether fund families should spell out if their offering is managed “to retirement” or “through retirement” — meaning it is invested for growth even after the specified retirement date. “If a target date fund is managed in a way that assumes that investors will redeem their shares at the target date, then investors need to be aware so that they can take that into consideration when they are assessing what investments may serve them well during their retirement,” Morningstar fund analysts noted.