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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
The Securities and Exchange Commission (SEC) has issued proposed regulations that would require a target date retirement fund that includes the target date in its name to disclose the fund's asset allocation at the target date immediately adjacent to the first use of the fund's name in marketing materials. Comments on the proposed rules are sought on or before August 23, 2010.
CCH Note: Target date funds, also known as "life cycle" funds, which are often available through 401(k) plans, are designed to simplify long-term investing by automatically adjusting to more conservative investments as the fund approaches a set date. In May 2010, the Labor Department's Employee Benefits Security Administration (EBSA) and the Securities and Exchange Commission (SEC) released guidance, in the form of an "Investor Bulletin" to help plan participants and investors better understand the operations and risks of target date funds (see CCH Pension Plan Guide Newsletter, Report No. 1837, May 17, 2010). Target date fund usage has increased through a number of avenues, including the funds' designation as one of three eligible "qualified default investment alternatives" (QDIAs) under the Pension Protection Act of 2006 (PPA; P.L. 109-280) and the growth of automatic enrollment plans, which frequently designate target date funds as the default investment for participants as they are put in the plan.
Under the proposed rules, a "target date fund" would be defined as an investment company that has an investment objective or strategy of providing varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures that changes over time based on an investor's age. This definition is intended to encompass target date funds that are marketed as retirement savings vehicles and to ensure that the proposed rules would apply to all funds that hold themselves out to investors as target date funds, including those that qualify under the Department of Labor's QDIA regulations.
Concerns about target date funds
Market losses incurred in 2008, coupled with the increasing significance of target date funds in 401(k) plans, have given rise to a number of concerns about target date funds. In particular, the SEC noted, concerns have been raised regarding how target date funds are named and marketed.
Target date funds that were close to reaching their target date suffered significant losses in 2008, and there was a wide variation in returns among target date funds with the same target date. Investment losses for funds with a target date of 2010 averaged nearly 24% in 2008, ranging between approximately 9% and 41% (compared to losses for the S&P 500 Index, the Nasdaq Composite Index, and the Wilshire 5000 Total Market Index of approximately 37%, 41%, and 37%, respectively). By contrast, in 2009, returns for 2010 target date funds ranged between approximately 7% and 31%, with an average return of approximately 22% (compared to returns for the S&P 500, Nasdaq Composite, and Wilshire 5000 of approximately 26%, 44%, and 28%, respectively). Although the 2009 returns were positive, the SEC noted that the differences between 2008 and 2009 returns demonstrate significant volatility. In addition, 2009 returns, like 2008 returns, reflect significant variability among funds with the same target date. A key factor explaining the variations in returns, according to the SEC, is the use of different asset allocation models by different funds, with the result that target date funds sharing the same target date have significantly different degrees of exposure to more volatile asset classes, such as stocks.
The schedule by which a target date fund's asset allocation is adjusted is commonly referred to as the fund's "glide path." The glide path typically reflects a gradual reduction in equity exposure before reaching a "landing point" at which the asset allocation becomes static. The SEC explained that, for some target date funds, the landing point occurs at or near the target date, but for other funds, the landing point is reached a significant number of years - as many as 30 - after the target date. While there are some target date funds with landing points at or near the target date, a significant majority have landing points after the target date, according to the SEC.
Disclosures required
To address these concerns, the SEC is proposing rules that would require a target date fund that includes the target date in its name to disclose the fund's asset allocation at the target date immediately adjacent to (or, in a radio or television advertisement, immediately following) the first use of the fund's name in marketing materials. The SEC is also proposing regulations that would require enhanced disclosure in marketing materials for a target date fund regarding the fund's glide path and asset allocation at the landing point, as well as the risks and considerations that are important when deciding whether to invest in a target date fund. Finally, the SEC is proposing rules that would provide additional guidance regarding statements in marketing materials for target date funds and other investment companies that could be misleading.
The SEC is also proposing enhanced disclosures to address concerns regarding the degree to which the marketing materials provided to 401(k) plan participants and other investors in target date funds may have contributed to a lack of understanding by investors of those funds and their associated strategies and risks. First, target date fund marketing materials that are in print or delivered through an electronic medium would be required to include a table, chart, or graph depicting the fund's glide path, together with a statement that, among other things, would highlight the fund's asset allocation at the landing point. Radio and television advertisements would be required to disclose the fund's asset allocation at the landing point. Second, the SEC would require a statement that a target date fund should not be selected based solely on age or retirement date, that a target date fund is not a guaranteed investment, and that a target date fund's stated asset allocations may be subject to change.
"These proposed rule changes would help clarify the meaning of the date in a target date fund and improve the information provided when these funds are advertised and marketed to investors," said SEC Chairman Mary L. Schapiro in a news release. "Together these rule amendments are designed to foster investor understanding of target date funds and reduce the possibility that investors will be confused or misled," she added.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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