Target Date Funds - What's In a Name?

Many investors lack financial literacy. Others simply do not have (or want) to take the time to manage their accounts. One answer -- target date funds (TDF). Pick your retirement date, and forget it. Someone else will manage the plan for you.

Unfortunately, there is no standard across the various TDFs as to the significance of the date used in the fund name. For example, the “target date” which is incorporated in the fund’s name could refer to the date by which the fund has liquidated the entire equity portion of its investment portfolio. It could, on the other hand, refer to the date at which the equity portion of the investment portfolio is at its lowest point in the entire life of the fund.

Another possibility is that the date in the fund’s name indicates the date on or near which it is assumed that the owner(s) of the fund have identified as a probable retirement date. Finally, the date in the fund name may indicate the date upon which the fund assumes that holders of the fund will cease further investment contributions into the fund and will commence gradual withdrawals of their fund holdings. Any one or more of the possibilities mentioned may describe the significance of the target fund name.

But why is this so confusing, especially for those who are looking for simplicity? Why don't TDFs reflect their purpose in the fund name and fully and clearly state in terms “calculated to be understood by the average plan participant”, 29 U.S.C. Section 1022, the meaning of the date which is used in the fund’s name?

The issue as to the meaning of the date in the fund name is generally referred to as the “Target To or Target Through” dichotomy, or the “target date or target death or landing point.” Whatever terminology is used to describe the issue, the critical point is that the Fund name and disclosures should make it abundantly clear whether the Fund is designed to take the investor to retirement or to carry the investor through retirement or to another point.

Indeed, descriptive (perhaps standardized) fund names that reflect the different objectives would be helpful to consumers, especially those who choose these types of funds for the very reason that they do not want to wade through disclosure documents. Moreover, the Funds should be required to furnish each investor adequate notice to permit the average plan participant to identify the Fund’s goals on the Target to or Target through issue, so that the investor will have sufficient opportunity to determine whether the investor and the Fund are well matched. And for those who just won't wade through a longer description, shouldn't there be one or two sentence description to accompany each fund name that could effectively communicate essential fund information to the investor?

The Department of Labor (and SEC) are looking at disclosure issues right now. Given the growth of TDFs, both employers and plan participants should have a better idea of what they are buying. Many learned too late, and much to their surprise, that their supposedly safe "Retirement 2010" fund was devastated in the recent downturn because it had over 60% invested in equities. The Department and the SEC should jointly explore how to better convey basic information on the objectives of TDFs to investors. What's in a name matters, and more standardized fund names and descriptions are needed.