As employer-sponsored retirement plans have increased their use, the Certified Financial Planner Board of Standards wants the federal government to prohibit target date funds from serving as default investments in 401(k) plans.

Marilyn Capelli Dimitroff

CFP Board Chair Marilyn Capelli Dimitroff also called them “misleading” at a joint Securities and Exchange Commission-Department of Labor hearing. She called on the government to amend its misleading names rules, saying “a target date fund’s name is a materially deceptive and misleading name unless the fund’s investments fall within an acceptable range of asset allocations consistent with its name.”

She asked the Labor Department to collaborate with the SEC to establish industry standards to ensure that target date funds “are not misleading to consumers on either extreme – too much cash for the young investor or too much equity for the investor nearing retirement.” The CFP Board wants standards identified and established by a panel of experts in retirement fund allocations, including practicing financial planners.

“If efforts to put such standards into place are not undertaken or not effective, the Department should proceed on its own to regulate target date funds that are used in 401(k) plans, or, repeal such funds’ eligibility as qualified default investment alternatives in employer sponsored retirement plans, Dimitroff said.

Dimitroff did not ask for a prohibition on all uses of the target date funds.

“Target date funds, appropriately managed, can be beneficial to investors. However, we have serious concerns that these funds are fundamentally misleading to investors because they are allowed to be managed in ways that are inconsistent with reasonable expectations that are created by titles used on the funds,” Dimitroff said.

Dimitroff said the SEC should amend Rule 35d-1 (the Investment Company Names rule), to include target date funds. She also recommended that the Department of Labor work with the SEC to establish industry-wide standards to stipulate an appropriate range of asset allocations for each date reflected in a target date fund.

Target date funds are investment vehicles that allocate their investments among various asset classes and automatically shift that allocation to more conservative investments as a “target” date approaches. This shift in asset allocation can vary significantly among funds using the same target date. In recent years, target date funds have grown increasingly popular in employer-sponsored retirement plans.

Dimitroff said that in 2008, the performance of target date mutual funds with 2010 in their name, had losses ranging from 3.6% to 41%.

“We believe that a loss of up to 41% of assets from a fund labeled 2010 is completely inconsistent with an investor’s reasonable expectation that his or her assets would not be subject to such high market volatility,” Dimitroff said. “It is not an answer to say that misleading fund names can be cured with effective disclosures. We must face the reality that disclosures are very often not read and more often not fully understood. Disclosures are simply not adequate to counteract the reasonable expectations created by a fund’s name.”