Just under an hour ago, the DOL-SEC hearing on target-date funds got underway. (No need to miss out on the events! Click here for a list of today's speakers and link to the live webcast.)

Scheduled to testify today is Jeff Coons, co-director of research at Manning & Napier Advisors. The firm's primary gig is managing lifecycle investments for employer clients to the tune of about $16 billion. I spoke with Coons yesterday to get his thoughts on how he saw today's hearing unfolding.

"I think it's going to be an interesting day of testimony, because lifecycle funds are an important tool and when it comes down to it, we believe strongly that target-date funds are among the best default options out there."

Well of course he believes that. But, I reminded him, the fact still remains that target-date funds had an abysmal year last year in terms of performance, with some dropping as much as 40% when the economy collapsed last fall. What lessons can target-date managers learn to prevent such losses from happening again?

"I think the biggest mistake target-date fund managers made was believing that diversification alone could manage risk," Coons admitted. "There were few safe harbors to be found in the markets last year."

He emphasized the need for target-date funds to "focus on disclosure -- how the funds are managed -- and improving transparency there." Although, naturally, he's against any sort of government regulation to mandate such openness.

Coons' peers share that opinion. As EBN's sister publication Money Management Executive reports:

The Investment Company Institute, for one, is against such limits. Imposing caps “would undermine the fiduciary role of employers who sponsor retirement plans and have a strong history of responsibly evaluating investment options for their workers,” ICI President and CEO Paul Schott Stevens told MarketWatch. “Regulation would also take away choice, stifle innovation and substitute government’s judgment for that of portfolio managers, employers, investors and the marketplace.”

Michael Herbst, a mutual fund analyst with Morningstar, characterized standardized disclosure as a realistic compromise, given that the industry will probably resist the DOL and the SEC “interfering with how the target-date funds operate” even though the reality is that “there’s a much wider range of philosophies and strategies within the target-date universe than most investors would imagine.”

But others dismiss disclosure as mere “tinkering” and wholly inadequate in light of the catastrophic losses that many investors suffered in target-date funds over the past 18 months. Mercer Bullard, founder of Fund Democracy said better disclosure is merely “punting the issue.”

“This is not a prospectus issue,” he said. “What we’re talking about here is a fund name and qualified default option that assume something generic about the investor’s need, and that’s what makes the funds potentially so misleading.”

As Coons said, it no doubt will be an interesting day of testimony. Stay tuned to the Daily Diversion for a wrap-up of today's events.


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