401k Investing – SEC Falls Short on Target Funds

Lack of risk language is a fatal flaw

   
401k Investing – SEC Falls Short on Target Funds

Many 401k investors have target funds as part of their mutual fund portfolio.Last week, the SEC proposed new rules they think will help individual investors in target date funds like Vanguard’s Target Retirement series, by requiring better disclosure of the funds’ asset allocation strategies.

Thanks but no thanks, 401k investing regulators.

The real issue here is risk, and in my reading of Chairman Mary Shapiro’s statement and the Fact Sheet that accompanied it, the SEC hasn’t gone nearly far enough.

The SEC says fund companies should be more transparent about the allocations between stocks, bonds and cash in their target funds. What isn’t mentioned is risk.

Just knowing a fund has 60% or 80% of assets in stocks won’t mean much to the millions of investors in 401(k) plans who are told to “set it and forget it.”

Hard numbers are needed, and there’s an easy way to provide them: Calculate an MCL, or maximum cumulative loss, number for every broad asset class and allocation, and print it prominently in all target fund marketing materials.

For example, take a fund that starts life with an allocation of 70% of assets to U.S. stocks, 20% to foreign stocks and 10% to bonds — akin to Vanguard’s Target Retirement 2050 (VFIFX). Your table might say:

A Guide to the Risks in Your Target Retirement Fund’s Asset Allocation

Allocation Worst loss Period of loss Months it took to recover
Domestic stocks 70% -51.0% Nov 2007 – Feb 2009

N.A.

Foreign stocks 20% -58.5% Nov 2007 – Feb 2009

N.A.

Bonds 10% -5.8% Mar 1987 – Sept 1987

4

Cash 0% 0.0%
Total 100%

And, if the fund’s been around for more than five years, say, then a maximum loss calculation should be made for that fund as well. For instance:

Risks in Your Target Allocation and Your Fund

Allocation Worst loss Period of loss

Months it took to recover

Domestic stocks 70% -51.0% Nov 2007 – Feb 2009

N.A.

Foreign stocks 20% -58.5% Nov 2007 – Feb 2009

N.A.

Bonds 10% -5.8% Mar 1987 – Sept 1987

4

Cash 0% 0.0%
Total 100%
Your fund 100% -47.9% Nov 2007 – Feb 2009

N.A.

As I said, the SEC got it partially right. Now if they really want to protect investors from themselves, and the folks providing services to their 401k plans, they’ll add some risk language to their guidelines.

Tell us what you think here.


Article printed from InvestorPlace Media, http://investorplace.com/2010/06/401k-investing-strategy-target-funds-mutual-fund-investment-vanguard/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.