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A few weeks ago, when writing about the hullabaloo over target-date funds, I wrote that your clients would want to know why there is suddenly a controversy “over the definition of target. Or date.”

Somewhat snarky perhaps, but lo and behold just this week the SEC has proposed new rules to help “clarify the meaning of a date in a target date fund’s name,” according to its official announcement.

So, why exactly is the name of a target-date fund so confusing?

The problems began to surface during the financial meltdown in 2008. That’s when these convenient funds turned out to be anything but. People who owned 2010 funds lost 23% of their assets. That kind of loss can be stomach churning anytime. But when you’re only two years away from retirement, and you’ve bought a special retirement fund with “2010” right in the name and it was supposed to automatically grow more conservative as you grew older, it can be especially unnerving.

Indeed, a lot of investors who assumed their money was mostly in bonds by then were shocked to learn that half of their assets were still in equities when they were planning to retire in two years.

The problems really come down to the fact that many of the target-date funds that are marketed as a certain year, say 2010, do not really reach their most conservative asset mix in that year. In fact, they may not reach the most conservative asset mix for another 20 years.

The basic theory behind that is this: The retirement date was designed as the date that investors stop making contributions, not necessarily the date they make a 180-degree turn from accumulation to distribution. They are going to live another 20 to 30 years and, according to the mutual fund companies, they still need to generate income.

Still, critics had been arguing that the funds needed to at least be better marketed.

Joe Nagengast, the founder of Target Date Analytics, testified in front of Congress last year on this issue and told us a few weeks ago that the problem that needs to be addressed is quite simple: “You need to regulate the name of the fund,” he said at the time. A fund that is called a 2010 fund should reach its most conservative asset mix in 2010.

That doesn’t mean necessarily that it has to be all in fixed-income; rather, it just needs to reach, on that date, whatever it originally said its most conservative allocation would ever be. To take an extreme example, he said that a target date fund that is still 80% in equities on the day someone retires is fine, as long as it’s marketed as such.

The new proposals, which the SEC passed unanimously, call for more clear marketing materials that would include the asset allocation in the name of the fund. It also would include a chart or graph that “clearly depicts the asset allocations among types of investments over the entire life of the fund,” according to the SEC’s announcement. The SEC will now accept public comments on the proposal for 60 days.

So what does all this mean to the advisor?

Most importantly, you need to understand the way that target-date funds work and what exactly happens on the date your client retires. And make sure they understand it too. And be sure to have a plan in place as to what they intend to do on that day. Do they want to keep their money in that fund, or do they plan to take all of it out and put it into something else? That distinction of accumulation and distribution is really the key to their understanding of this whole issue.

They simply need to have a plan in mind, and if they’re not asking you about it, then you need to prompt the conversation.

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