Via e-mail to e-ORI@dol.gov 

July 2, 2014 

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Room N-5655 

U.S. Department of Labor 

200 Constitution Avenue, N.W. 

Washington, DC 20210 

Re: RIN 1210-AB38; Target Date Disclosure (ICI Comment Letter to DOL on SEC’s 

Investor Advisory Committee Recommendation Regarding a Risk-Based Asset Allocation 

Glide Path Illustration) 

The Investment Company Institute1

 appreciates the opportunity to provide comments to the 

Department of Labor (“Department”) on the recommendation by the Securities and Exchange 

Commission’s Investor Advisory Committee (the “Committee”). The Committee recommended that 

the Commission develop a glide path illustration for target date funds that is based on a standardized 

measure of fund risk as a replacement for, or supplement to, the asset allocation glide path illustration 

that was part of a rule proposal issued by the Commission in 2010.2 The Department has decided to 

seek public comment on the Committee’s recommendation in connection with the Department’s own 

proposal (“2010 Proposal”), which would enhance disclosures about target date funds by amending its 

 

1

 The Investment Company Institute is the national association of U.S. investment companies, including mutual funds, 

closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). ICI seeks to encourage adherence to 

high ethical standards, promote public understanding, and otherwise advance the interests of funds, their shareholders, 

directors, and advisers. Members of ICI manage total assets of $17.1 trillion and serve more than 90 million shareholders. 

2 See Investment Company Advertising: Target Date Retirement Fund Names and Marketing, SEC Release Nos. 33-9126; 34-

62300; IC-29301 (June 16, 2010), 75 FR 35920 (June 23, 2010) (the “SEC Proposal”). In response to the Committee’s 

recommendations, the Commission sought additional public comment related to its 2010 proposal to require certain 

disclosures in target date fund (“TDF” or “target date fund”) marketing materials. See Investment Company Advertising: 

Target Date Retirement Fund Names and Marketing, SEC Release Nos. 33-9570; 34-71861; IC-31004 (April 3, 2014), 79 

FR 19564 (April 9, 2014) (the “Release”). Our related comment letter to the SEC is attached and is also available at 

www.sec.gov/comments/s7-12-10/s71210-114.pdf. (“SEC Comment Letter”). 
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qualified default investment alternative regulation (29 CFR § 2550.404c-5) and participant-level 

disclosure regulation (29 CFR § 2550.404a-5)(collectively, the “Regulations”).3 

The Institute strongly supported the Department’s 2010 Proposal to enhance target date fund 

disclosure to retirement plan participants. In particular, the Institute supported requiring narrative 

disclosure explaining a TDF’s asset allocation graphically (“asset allocation glide path illustration”) in a 

manner that does not “obscure or impede” understanding of the narrative information.4 We believe 

this disclosure would enhance plan participants’ understanding of TDFs.5 While we remain committed 

to enhancing investor understanding of target date funds, we believe that requiring a standard measure 

of risk, either alone or in the construction of a risk-based glide path illustration,6

 would require the 

adoption of a single-dimensional risk standard that simply cannot adequately convey the multidimensional aspects of risk. All risk measures have inherent limitations; therefore, requiring the use of 

any such measure may confuse and even possibly mislead plan participants. We are particularly 

concerned that plan participants will place undue reliance on such a government authorized standard. 

For these reasons, we urge that the Department not adopt amendments to the Regulations that 

stipulate the use of a risk-based glide path illustration for target date funds. Rather, we urge the 

Department to continue with its approach to the asset allocation glide path set forth in the 2010 

Proposal. 

More specifically, our comments in response to the Committee’s recommendation include the 

following points, all of which are discussed in greater detail below. 

• There is no single measure of risk on which the industry has settled. This is due to the 

complexity and multi-faceted nature of risk and the inherent limitations of any single 

measure. 

 

3 See 75 FR 73987 (Nov. 30, 2010). For the Department’s announcement regarding reopening of the comment period, see

79 FR 31893 (June 3, 2014). The amendments to the Regulations regarding TDF disclosures would apply to all target date 

funds and arrangements, regardless if they are offered as mutual funds or other types of investment products.

4 See letter from Mary S. Podesta, Senior Counsel—Pension Regulation, Investment Company Institute, to Office of 

Regulations and Interpretations, EBSA (January 14, 2011), available at www.dol.gov/ebsa/pdf/1210-AB38-014.pdf. See

also letter from David M. Abbey, Senior Counsel—Pension Regulation, Investment Company Institute, to Office of 

Regulations and Interpretations, EBSA (Jul 9, 2012), available at www.dol.gov/ebsa/pdf/1210-AB38-RCP0006.pdf. 

5

 In June 2009, the Institute published Principles to Enhance Understanding of Target Date Funds (June 2009) (“Principles”), 

available at www.ici.org/pdf/ppr_09_principles.pdf, which identified key pieces of information that it recommended should 

be prominently conveyed by target date funds, including an asset allocation glide path illustration accompanied by a 

narrative disclosure. 

6

 For purposes of this letter, our concerns expressed with regard to the use of standard risk measures are intended to include 

the use of the measures alone or in the construction of a risk-based glide path illustration. 
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• Managers of target date funds attempt to address a variety of risks faced by individuals 

investing for retirement. In addition to return volatility risk, target date fund managers 

also consider longevity or shortfall risk (i.e., the risk of outliving one’s assets), inflation 

risk (i.e., the risk that the purchasing power of one’s assets will erode over time), and 

income replacement risk (i.e., the risk that the income provided for in retirement will 

not be sufficient). 

• Risk metrics can be helpful tools for assessing one of these risks, i.e., the potential return 

volatility risk of an investment portfolio, but a simplistic use of such measures in the 

construction of a risk-based glide path will harm, rather than help, plan participants. 

Widely identified weaknesses include the limitations of historical data on which they 

are based, the challenges associated with adapting such data to a particular portfolio, 

and the inability of data to account sufficiently for market events with no historical 

precedent. 

• Commentators have criticized the use of risk ratings in the few foreign jurisdictions in 

which they are used. 

• Plan participants may be confused and misled by a risk-based glide path illustration, 

because such an illustration: 

o may not be comprehensible to plan participants not familiar with the statistical 

concepts underpinning the glide path’s construction (e.g., standard deviation 

or beta); 

o would erroneously suggest that future levels of risk in a fund are reasonably 

predictable; 

o likely would cause plan participants to view the illustration as predictive of 

future performance; 

o would not accurately reflect how most target date funds are managed; and 

o would cause plan participants to de-value other important investment 

considerations, such as longevity and inflation risks and return potential, which 

will make it more difficult for them to realize their retirement goals. 

• An asset allocation glide path is an effective proxy for return volatility risk and shows 

actual intended asset allocations, facilitating comparisons among target date funds. 
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• The asset allocation glide path illustration and other disclosure requirements 

contemplated in the 2010 Proposal, together with all of the information that plan 

participants and plan fiduciaries currently have available, provide an effective and 

comprehensive picture of fund risk. 

• If the Department chooses to pursue some type of risk-based glide path as part of its 

amendments to the Regulations, it is critical that it first seek comment on a specific 

proposal and its associated regulatory impact analysis before adopting it. 

I. Background on Target Date Funds and the Committee’s Recommendation

Asset allocation is one of the most important factors in long-term portfolio performance. 

Target date funds provide an efficient way for an investor to invest in a mix of asset classes through a 

single fund that rebalances its portfolio over time to become less focused on growth of principal and 

more focused on current income and lessening principal fluctuation. For this reason, target date funds 

have proven to be a valuable innovation for defined contribution plans and other individual retirement 

account savings vehicles. At year-end 2013, target date mutual funds had $618 billion in assets, 

including $430 billion held in defined contribution plans and another $124 billion held in IRAs.7 At 

year-end 2012, 72 percent of 401(k) plans in the EBRI/ICI 401(k) database included target date funds 

in their investment lineups, 41 percent of 401(k) plan participants had at least some portion of their 

account in these funds, and 15 percent of total assets in 401(k) plans in the EBRI/ICI 401(k) database 

was in target date funds.8 

Target date funds invest in multiple asset classes, ranging from domestic and international 

equities to corporate and government bonds and cash. To achieve the same benefits with a selfmanaged portfolio, an investor would have to select and monitor a number of individual funds and 

regularly transfer money among them. The design of target date funds avoids the extreme asset 

allocations observed in some retirement accounts. For example, some young workers invest very 

conservatively by allocating all, or almost all, of their accounts to fixed income investments, while some 

participants nearing retirement invest very aggressively, allocating all, or almost all, of their accounts to

 

7 See Table 20 in Investment Company Institute, The U.S. Retirement Market, Fourth Quarter 2013 (March 2014), available 

at www.ici.org/info/ret_13_q4_data.xls. 

8

 In an ongoing collaborative effort, the Employee Benefit Research Institute and the Investment Company Institute collect 

annual data on millions of 401(k) plan participants as a means to accurately portray how these participants manage their 

accounts. The EBRI/ICI database includes data on target date funds offered as mutual funds, collective investment trusts, 

and other investment vehicles. The EBRI/ICI 401(k) database is the largest, most representative repository of information 

about individual 401(k) plan participant accounts. The EBRI/ICI 401(k) database includes statistical information on 24.0 

million 401(k) participants, in 64,619 employer-sponsored 401(k) plans, holding $1.536 trillion in assets at year-end 2012. 

See Holden, VanDerhei, Alonso, and Bass, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2012, ICI 

Research Perspective 19, no. 12, and EBRI Issue Brief, no. 394 (December 2013), available at www.ici.org/pdf/per19-

12.pdf. 
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equity investments.9 Target date funds follow professionally designed asset allocation models to 

eliminate such extremes. 

The Committee’s recommendation stems from its concern about the effectiveness of the asset 

allocation glide path illustration as a proxy for risk. The Committee’s recommendation begins by 

acknowledging that “[m]uch of those differences in risk [i.e., differences in returns in 2008 and 2009 

among funds with a 2010 target date] can be explained by differences in the asset allocation models and 

glide paths used by different funds, as different target-date funds with the same target dates may pursue 

vastly divergent investment strategies.”10 The recommendation notes that “choices of assets within the 

various asset classes, inclusion of assets from outside the traditional asset classes, and other risk 

management practices can also have a significant impact on fund risk levels.” The recommendation 

concludes by noting that “[a] glide-path illustration based solely on asset allocation is therefore unlikely 

to reliably capture potentially significant differences in fund risk levels. Asset allocation is a particularly 

unreliable proxy for risk where the asset classes are defined quite broadly, as they are in the Commission 

proposal.” The Committee does not offer a specific proposal in this regard, but suggests that the 

Commission “focus on factors such as maximum exposure to loss or volatility of returns that are 

directly relevant to the primary concerns of those approaching retirement.”11

 

For the reasons set forth below, we strongly disagree with the Committee’s assessment and 

oppose its recommendation to mandate a risk-based glide path illustration. 

II. A Standardized Measure of Risk Is Inappropriate for Target Date Funds 

There continues to be no agreed to or widely accepted approach to the measurement of risk. 

The absence of industry agreement on a single risk measure is not due to a lack of effort or ingenuity. 

Rather, the lack of consensus is due to the complexity and multi-faceted nature of risk, and the inherent 

limitations of any single measure. Trying to apply a single measure to target date funds is particularly 

inappropriate, given their use of multiple asset classes and changing asset allocations. 

A. “Risk” is a Multi-Faceted Concept 

As an initial matter, a proper evaluation of the relative merits of an asset allocation glide path 

illustration and a risk-based glide path illustration requires an understanding of “risk.” Risk, broadly 

and properly understood, is a multi-faceted concept. Risk metrics currently in use focus solely on 

determining return volatility risk, i.e., the likelihood that an investment will go up or down in value 

 

9 See 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2012, ICI Research Perspective 19, no. 12, and 

EBRI Issue Brief, no. 394, supra. 

10 The Recommendation of the Investor Advisory Committee, Target Date Mutual Funds (adopted April 11, 2013) is 

available at www.sec.gov/spotlight/investor-advisory-committee-2012/iac-recommendation-target-date-fund.pdf. 

11 Id.
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relative to a base line. Managers of target date funds, however, attempt to address a variety of risks faced 

by individuals investing for retirement. In addition to return volatility risk, target date fund managers 

also consider longevity or shortfall risk (i.e., the risk of outliving one’s assets), inflation risk (i.e., the risk 

that the purchasing power of one’s assets will erode over time), and income replacement risk (i.e., the 

risk that retirement income will not be sufficient). 

B. Potential Risk Measures Have Significant Limitations 

There are several risk metrics that measure the historical return volatility of portfolios of 

securities, including standard deviation,12 semi-variance,13 and beta.14 These metrics are subject to the 

limitations of the historical data on which they depend, the challenges associated with adapting such 

data to a particular portfolio, and the inability of data to account sufficiently for market events with no 

historical precedent. Accordingly, while risk metrics can serve a critical function when used by 

investors who are knowledgeable of their limitations, a mandated simplistic presentation of these 

measures raises significant concerns. 

A few foreign jurisdictions require or permit funds to identify risk ratings.15 A review of these 

risk rating systems and the criticisms they have drawn readily illuminates the pitfalls of attempting to 

identify and measure risk by using a single standardized numerical score or label (e.g., “Very High 

[Risk]”). For instance, the European Securities and Markets Authority (“ESMA”) has required that all 

UCITS IV funds include the Synthetic Risk and Reward Indicator (“SRRI”) number (which ranges 

from 1 (lowest risk/reward) to 7 (highest risk/reward)) in their Key Investor Information Documents 

(“KIIDs”).16 Commentators have expressed numerous concerns with the SRRI, including, for example, 

that different sources of risk are not captured by the measure;17 that risk ratings may cause investors to 

 

12 Standard deviation is used to calculate the probability that under certain circumstances an investment’s returns will fall 

within a range of its average returns approximately two-thirds of the time. For example, a large utility stock will generally 

have a lower standard deviation than a small capitalization growth stock. 

13 Semi-variance can be used to measure the variability of returns below the average return. A fund with a larger semivariance has returns that are more spread out below the average return. 

14 Beta measures the sensitivity of an investment’s returns to those of the market generally. The market has a beta of 1.00 

and, therefore, a portfolio with a beta of 1.10 is considered to be 10 percent more volatile than the market. 

15 Appendix A to the Institute’s SEC Comment Letter (“Appendix A”) includes a summary of these approaches. 

16 See Appendix A, note 75, for a description of KIIDs. 

17 Paul D. Kaplan, PhD, Quantitative Research Director, Morningstar Europe, Ltd., What the Synthetic Risk Reward 

Indicator Doesn’t Indicate About Risk or Reward (2011), available at www.vff.no/filestore/PaulKaplanWhattheSyntheticRiskRewardIndicatorDoesntIndicateAboutRiskorReward.pdf (stating, among other things, that SRRI 

does not adequately capture market risk, active risk, and currency risk, and that the possibility of extreme events is not 

revealed). 
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place too much emphasis on volatility and forego the opportunity to benefit from higher returns;18 and 

that, because similar types of funds tend to fall within just a couple of the risk categories (i.e., 

“crowding”), the benefits of these comparative scores are limited.19 

Similarly, Australia’s use of the Standard Risk Measure (“SRM”) (which utilizes a 7-level 

classification system with risk labels ranging from “Very Low” to “Very High”), which Australian 

authorities “strongly recommended” in 2011 for Australian super funds,20 has also been criticized. 

Commentators have expressed concern that the calculation of SRM does not account for the size of an 

adverse event (i.e., any negative return regardless of magnitude is treated the same), and that its 

subjective application creates an incentive to adopt a methodology resulting in a lower risk score.21 The 

SRM methodology also has been criticized for misleadingly applying a single level of risk to any 

investment option, given that the level of risk that is undertaken by investors relates to their investment 

timeframes and objectives, which will vary. It also has been pointed out that annual volatility, which is

what SRM measures, is not the only risk and is much less of a risk for younger investors than 

inflation/adequacy, and that SRM reinforces short-term thinking about investing because of its focus 

on volatility in annual returns.22

 

Finally, Canadian fund managers are required to provide risk ratings (based on a 5-level scale 

ranging from “Low” to “High”) for mutual funds in their Fund Facts.23 As with Australia’s SRM, 

Canada’s current approach has been criticized for, among other things, the subjectivity of the 

methodology used.24 

 

18 Alex Hoctor-Duncan, Head of Retail in Europe, the Middle East and Africa for BlackRock, Crouching Tiger Hidden 

Danger, Strategic Solutions Magazine Q1-2 2012 issue, available at www.blackrockinternational.com/public/enzz/literature/brochure/strategic_solutions_crouching_tiger.pdf. 

19 Ed Moisson, Head of UK & Cross-Border Research, Lipper, and Kevin Pollard, Research Analyst, Methodology, Lipper, 

SRRI European Overview (May 2012), available at 

share.thomsonreuters.com/PR/Lipper/Reports/Lipper_SRRI_European_May2012.pdf. For the period studied, 94.5% of 

equity funds had a risk rating of 6 or 7, and 74.4% of bond funds had a risk rating of 3 or 4.

20 See Appendix A, note 78, for a description of superannuation and Australian super funds. 

21 David Bell, Is APRA’s Standard Risk Measure Helpful? (Feb. 20, 2013), available at www.cuffelinks.com.au/is-aprasstandard-risk-measure-helpful/?COLLCC=2680257826. 

22 Australian Institute of Superannuation Trustees, APRA Discussion paper, Reporting Standards for Superannuation

(November 2012), available at www.aist.asn.au/media/11489/2012.11.16_APRA_DP_Reporting_Standards.pdf. 

23 See Appendix A, note 81, for a description of the Canadian Fund Facts. 

24 See Canadian Securities Administrators (“CSA”) Notice 81-324 and Request for Comment—Proposed CSA Mutual Fund 

Risk Classification Methodology for Use in Fund Facts, in which the CSA noted that it had received feedback from 

stakeholders indicating that a standardized risk classification methodology would be more useful to investors as it would 

provide a consistent and comparable basis for measuring the risk of different mutual funds. 
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C. Limitations of Risk-Based Measures Are Magnified When Applied to Target Date 

Funds 

In light of their limitations and difficulties discussed above, we oppose mandating risk metrics. 

For the reasons set forth below, mandatory risk metrics are particularly unsuitable and problematic to 

implement for target date funds. 

1. Conventional Risk Measures Do Not Work for Target Date Funds 

As the Department is aware, a target date fund’s asset allocation changes throughout the fund’s 

investment horizon (i.e., its glide path) until it reaches a “landing point” at which the asset allocation 

generally becomes static. As a fund’s asset allocation changes, its risk profile also changes. It therefore is 

not possible to take a risk metric such as standard deviation of returns, calculated over a set period based 

on a given asset allocation at a point in time, and extrapolate the same risk metric out over the life of a 

target date fund.25 In addition, the plotting of changing risk indicators over specific points on the glide 

path (e.g., the starting point, retirement date and landing point) would be problematic. In particular, it 

would not directly address the return volatility risk of the target date fund over its entire investment 

horizon or, for example, convey the impact that taking on greater return volatility risk in the early years

of the glide path would have on the fund’s ability to increase its returns over its entire investment 

horizon. 

Another difficulty in applying risk-based measures to target date funds relates to the limitation 

of historical data and challenges in adapting such data to a specific target date fund portfolio. As noted 

above, all risk metrics use historical data to make assumptions about future risk, and history may not be 

a reliable predictor of future markets nor sufficiently account for major, unforeseen market events with 

no historical precedents (e.g., 2007–2008 market events). Beyond these obvious limitations, target date 

funds are composed of multiple asset and sub-asset classes whose weightings and representative 

investments will change over time. Interpreting from data how and at what level of precision these 

varying assets correlate presents potentially unknowable challenges. This is particularly true for target 

 

25 In this respect, given a target date fund’s changing asset allocations, measures of a target date fund’s standard deviation of 

returns likely would be limited to relatively short time intervals (e.g., annualized standard deviation of returns). Such a

relatively short-term volatility measure would not be particularly relevant to retirement investors with long-term time 

horizons. Similarly, the use of beta—which is only meaningful when used in relation to an index—presents a unique 

challenge for target date funds which invest in a number of asset and sub-asset classes whose weightings shift over time, and 

for which there is unlikely to be an appropriate index to use for this purpose. If a broad-based equity index were used, we 

would expect the risk-based glide path to show increasing divergence from the index, and a declining beta relative to that 

index, over time. The practical benefits of such a presentation for investors are questionable. Because beta is a measure of 

relative risk, it would not convey the absolute return volatility risk of either the index or the fund. This information would 

be useful only to those investors who already have a good sense of the absolute volatility of the index, and even then, they 

would have to, in effect, extrapolate the fund’s comparative absolute volatility from the illustration. 
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date funds that diversify beyond equities and bonds and seek exposure to new asset and sub-asset classes 

such as emerging markets, real estate, natural resources and commodities. The fact that a target date 

fund’s asset allocation glide path itself will not necessarily remain fixed complicates matters further.26 

Given the inherent limitations in applying conventional risk measures to target date funds with 

changing asset allocations, we expect that some commenters might recommend the use of stochastic 

modeling, such as Monte Carlo simulation techniques, in connection with the construction of a riskbased glide path. While fund sponsors can and do use such techniques to help them gauge the 

probability of achieving a desired return and construct asset allocation glide paths, there is no industry 

wide standard for doing so. Minor changes to the inputs and assumptions used can cause wide 

differences in the results. The potential for inconsistent inputs and assumptions is a significant 

impediment to conducting systematic, rigorous analysis among target date funds. Additionally, the use 

of such techniques necessitates value judgments regarding, among other things, the periods along the 

glide path during which investors are best able to respond to return volatility risk and at what levels. 

The Department could as a theoretical matter consider the adoption of a standardized approach to the 

use of such techniques. To actually implement such an approach in practice, however, it would need to 

make a series of technical decisions and value judgments regarding, among other things, the level of 

specificity required for inputs associated with asset classes, sub-asset classes and statistical correlations 

among such assets, and the number of simulations to be used. 

Finally, the challenges in applying risk-based metrics to target date funds identified above apply 

regardless of whether the metric is backward-looking or forward-looking. While one could argue that a 

backward-looking metric is not inherently speculative in the way that forward-looking metrics are, a 

backward-looking metric would be particularly ill-suited for use with a target date fund in light of such

fund’s changing asset allocation. For instance, suppose a fund with a target retirement date of 2050 

launched in 2010. It would have just over four years of actual performance—or backward-looking 

data—on which to gauge the potential risk of the target date fund with an investment horizon of 

several more decades and with asset allocations that will change over time. 

2. Retirement Plan Participants Would Be Confused and Potentially Misled by a 

Risk-Based Glide Path Illustration 

In addition to the difficulties with applying conventional risk measures to target date funds 

described above, we believe that most plan participants would have difficulty understanding and may be 

misled by a risk-based glide path illustration. 

A mandated risk metric would imply a level of precision and reliability that is unwarranted. 

Plan participants who are the focus of the Department’s rulemaking efforts are unlikely to have the 

 

26 In this respect, consistent with disclosure in their prospectuses, funds often reserve the right to deviate from the future 

asset allocation percentages identified in seeking to meet the funds’ investment objectives. 
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financial sophistication necessary to recognize the limitations of risk metrics and likely would place too 

much trust in such metrics.27 Simply providing, for example, a backward-looking measure of a fund’s 

return volatility risk such as standard deviation could lead investors to assume that the numbers 

presented are intended to represent a true indication of future volatility.28 Moreover, because a riskbased glide path would also project risk in future years, the consequences of overreliance are 

compounded. Participants presented with a simplistic depiction of return volatility risk would simply 

be unlikely to understand that, in practice, a fund could behave very differently as a result of market 

conditions and changes in underlying portfolio holdings, and the correlations in returns of those 

holdings. 

Additionally, we do not believe it is possible for regulators to select a risk measure that would 

have a high degree of relevance for differently situated participants. For example, it may be entirely 

appropriate for a relatively young investor decades away from retirement to conclude that the potential 

for increased long-term rates of return is worth taking on increased short-term volatility. The danger is 

that such an investor could be discouraged from investing in a fund with a relatively higher standard 

deviation, concluding based on a review of this single metric that the fund is “too risky.” Thus, if the 

Department adopted standard deviation as the basis for a risk-based glide path, it implicitly would be 

encouraging many investors unwisely to favor funds with less short-term volatility, and thus forego 

potentially superior long-term fund performance. 

Requiring a risk-based glide path may also confuse and potentially mislead plan participants 

about how most target date funds are managed. Based on a review of our members’ practices, most 

target date funds are not managed to a specific target risk level. Rather, they are managed to an 

optimized risk/return goal reflected by the fund’s predetermined asset allocation glide path. The 

imposition of a risk-based glide path would therefore be something of a forced construct for most 

funds. It would cause investors mistakenly to conclude that the funds were being managed to a single, 

targeted risk metric, when in fact an asset allocation glide path better illustrates the portfolio 

management practices of most target date funds. 

Finally, we also do not believe that an explanatory statement preceding or accompanying the 

risk-based glide path illustration (which, among other things, could explain that certain risks are not 

captured by the illustration) would sufficiently overcome these mistaken impressions. Prophylactic 

disclosure would not adequately temper the message from the illustration, especially given the de facto 

 

27 Overreliance on risk metrics is not just a concern for unsophisticated investors. Even many investment professionals were 

said to have relied too heavily on risk metrics in failing to gauge the severity of the financial crisis in 2007–2008. See Joe 

Nocera, Risk Management, The New York Times Magazine (Jan. 2, 2009). 

28 In this respect, plan participants are not likely to understand the nuances of the measure or its limitations with respect to 

predictability and precision. For instance, a fund that consistently loses 10 percent annually would have a standard 

deviation of zero and, like most investors, plan participants may mistakenly view such a fund as having no risk. 
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imprimatur implied by a government-mandated risk measure.29 Moreover, a risk based glide path 

illustration would apply solely to the TDF and not the other plan options. Singling out the TDF in this 

way could lead participants incorrectly to conclude that the TDF is the riskiest option and therefore 

impede informed decision-making and the ultimate achievement of retirement goals. 

III. The Asset Allocation Glide Path Illustration and Other Disclosure Requirements 

Effectively Describe Risk 

In addressing the Committee’s concerns with the asset allocation glide path,30 it is important 

for the Department to assess how the disclosures described in the DOL Proposal in their entirety, 

together with other information that plan participants and plan fiduciaries currently have at their 

disposal, will inform their understanding of target date funds. 

A. The Asset Allocation Glide Path is an Effective Proxy for Return Volatility Risk

The Institute agrees with the Committee’s statement that “much of the differences in risk 

among target date funds can be explained by differences in asset allocation models and glide paths.”31 

Evidence indicates that, in 2008, a broad asset allocation glide path (i.e., one showing a fund’s 

investments in stocks and bonds only) would have provided effective information to investors in funds 

near their target dates. Appendix B to the Institute’s SEC Comment Letter presents results of a 

statistical analysis that seeks to explain the 2008 returns of individual target date funds. It is based on 

what investors knew from data that were publicly available in 2007 about the percentages of these 

funds’ assets that were held in stocks and in bonds. The results indicate that very basic asset allocation 

information explains most of the wide variability in the 2008 returns of target date funds had investors 

known in 2007 how stock and bond markets would behave the following year. 

From this analysis, two conclusions can be drawn. First, to the extent the performance of 2010 

target date funds surprised their investors in 2008, it most likely reflects an unawareness that funds near 

to their target retirement dates may still hold a significant portion of their assets in stocks or other 

securities that are more volatile than, say, U.S. government bonds.32

 

 

29 Such extensive disclosure also would be difficult to accommodate in the disclosures contemplated by the Regulations. 

30 As discussed above, see supra notes 10 and 11 and accompanying text, the Committee’s recommendation stems from its 

concern about the effectiveness of the asset allocation glide path as a risk measure. 

31 See supra notes 10 and 11 and accompanying text. 

32 As discussed infra in the text accompanying note 33, the 2010 Proposal specifically deals with this concern by, among 

other things, requiring an asset allocation glide path and a narrative explanation of a TDF’s asset allocation illustrating how 

the asset allocation will change over time, including the point in time where the fund will reach its final asset allocation. 
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Additionally, any measure intended to highlight to investors the range of returns they might 

experience will heavily depend on actual market outcomes. In years when the stock market declines, 

those target date funds with heavier allocations to stocks may experience unfavorable returns. 

Alternatively, in years when the bond market declines but the stock market advances, such as in 2013, 

these same funds would experience favorable returns. Thus, the perceptions that investors form of their 

target date funds will depend in large part on specific stock and bond market outcomes. This illustrates 

a difficulty that could arise from use of a risk-based glide path: presumably, a fund with a heavy 

allocation to fixed income securities would be seen as “less risky,” but in certain years (e.g., 2013) such a 

fund might nevertheless surprise its investors because of muted or even negative returns. 

The Institute’s analysis suggests that even a simple asset allocation glide path illustration (e.g., 

one showing only equities, bonds, and cash) can effectively explain fund performance (after the fact), 

and conveys useful information about a target date fund’s overall performance risk profile and return 

potential. While a more granular asset allocation glide path illustration (e.g., one showing sub-asset 

classes such as domestic and international equities and bonds, or alternative asset classes) would 

incrementally improve the indication of return volatility risk, our research suggests a diminishing 

predictive return when additional variables are considered in the form of sub-asset classes or alternative 

asset classes. We are concerned that a more elaborate asset allocation glide path could reduce the clarity 

and understandability of the presentation, thereby outweighing the benefits of increased granularity. In 

other words, there are trade-offs between the amount of detail that can be captured in this type of 

presentation and its clarity and understandability. This is especially true for those participants who 

would be provided the disclosures contemplated by the 2010 Proposal. 

Beyond conveying useful information about a target date fund’s overall risk profile and return 

potential, the asset allocation glide path illustration offers a number of other benefits, especially in 

comparison with a risk-based glide path. First, asset allocation glide path illustrations, combined with 

narrative disclosures that help investors to infer levels of risk from an asset allocation glide path, convey 

critical information about both the funds’ future investments and their investment risk profiles in an 

easy-to-understand format. Moreover, an asset allocation glide path illustration conveys this 

information without implying that it is possible to actually predict it. By contrast, a risk-based glide 

path may not be comprehensible to investors, like plan participants, who are generally unfamiliar with 

statistical concepts upon which it would be constructed, such as standard deviation, beta, or whatever 

other risk-based alternative may be chosen. 

Second, managers of target date mutual funds more commonly (when looking at overall assets 

of such funds or the overall number of funds) construct a targeted asset allocation and manage to it over 

time. Consequently, an asset allocation glide path illustration better reflects how most portfolio 

managers think about and manage their funds. 
Office of Regulations and Interpretations 

Employee Benefits Security Administration 

July 2, 2014 

Page 13 of 15 

Finally, an asset allocation glide path illustration shows actual intended asset allocations and 

therefore, allows for better glide path comparability among target date funds than would a risk-based 

glide path. A risk-based glide path can be based only on predictive measures of volatility in future years, 

over which portfolio managers have far less control than a fund’s asset allocation. 

B. Other Disclosures Complement the Asset Allocation Glide Path 

In addition to the asset allocation glide path, the 2010 Proposal would require that participants 

receive a narrative explanation of a target date fund’s asset allocation, how the asset allocation will 

change over time, and the point in time where a target date fund will reach its final asset allocation. 

Participants must also be provided with a statement summarizing key features of the fund, including 

the importance of considering the investor’s risk tolerance, personal circumstances, and complete 

financial situation, as well as a statement that an investment in the fund “is not guaranteed and that it is 

possible to lose money by investing in the [fund].” Moreover, this information would complement the 

information required by of the participant-level disclosure regulation,33 including, among other 

disclosures — 

• a description of the target date fund’s objectives or goals; 

• the fund’s principal strategies (including a general description of the types of assets held 

by the fund), and principal risks (e.g., as required by the Commission’s Form N-1A); 

• the fund’s historical performance data (e.g., 1-, 5-, and 10-year returns); and 

• a statement indicating that an investment’s past performance is not necessarily an 

indication of how the investment will perform in the future.34 

This information provides a comprehensive and multi-faceted picture of target date fund risk. 

Additionally, as the Department is aware, target date funds are selected as investment options 

in employer-provided retirement plans. In connection with the selection of a particular target date 

fund for a plan, plan fiduciaries are required under ERISA to obtain information that will enable them 

to evaluate the prudence of any target date funds they are considering, including information regarding 

investment strategies and glide paths which may impact the way in which a target date fund performs.35

 

In selecting a TDF option for the plan, plan fiduciaries receive, or have ready access to, risk information 

 

33 See 29 CFR § 2550.404a-5(d)(3). 

34 See DOL Proposal, 75 FR at 73989. 

35 See Target Date Retirement Funds—Tips for ERISA Plan Fiduciaries, available at www.dol.gov/ebsa/pdf/fsTDF.pdf. 
Office of Regulations and Interpretations 

Employee Benefits Security Administration 

July 2, 2014 

Page 14 of 15 

in prospectuses,36 SAIs,37 shareholder reports,38 and marketing materials. Prospectuses and SAIs 

contain detailed narrative risk disclosure, and shareholder reports (through, e.g., management’s 

discussion of fund performance) include (often more topical) risk information as well. In addition, the 

performance bar charts in fund prospectuses and summary prospectuses and the performance “line 

graphs” in annual reports present useful and intuitive graphic measures of risk and are available to plan 

fiduciaries as well as plan participants. This information provides plan fiduciaries with the details 

necessary to make well-informed decisions as to the appropriateness of the TDF to be used within their 

plans. 

IV. Process Considerations 

Finally, we note that the Committee’s recommendations lack detail regarding any proposed 

methodology for a risk-based glide path. If the Department determines to pursue including such a 

requirement in its amendments to the Regulations, it is critical that it first seek comment on a specific 

proposal and its associated regulatory impact analysis before adopting it. The 2010 Proposal included a 

regulatory impact analysis and solicited comment on that analysis. The Department’s decision to move 

forward with dramatic changes to the 2010 Proposal, such as the adoption of a risk-based glide path 

illustration, would require a re-evaluation of that initial analysis, and would require providing the 

public with the opportunity to reconsider and comment on the new analysis. 

* * * * 

 

36 See Items 4(b) and 9(c) of Form N-1A. 

37 See Items 16(b) and 17(b) of Form N-1A. 

38 See Item 27(b)(7)(i) of Form N-1A. 
Office of Regulations and Interpretations 

Employee Benefits Security Administration 

July 2, 2014 

Page 15 of 15 

We appreciate the Department’s efforts to supplement its rulemaking initiatives by taking into 

account comments on the Committee’s recommendations,39 and we would be happy to discuss in detail 

any of our comments on this issue or the 2010 Proposal with staff. Please do not hesitate to contact me 

at (202) 326-5920 or Matt Thornton (Assistant Counsel ­ Securities Regulation) at (202) 371-5406 if 

you have any questions. 

Sincerely, 

 /s/ David M. Abbey 

 David M. Abbey 

 Senior Counsel – Pension Regulation 

Attachment: Letter from Dorothy Donohue, Acting General Counsel, Investment Company 

Institute, to Kevin M. O’Neill, Deputy Secretary, Securities and Exchange Commission 

(June 9, 2014). 

 

39 We also appreciate the Department’s efforts to coordinate amendments to the Regulations with the Commission’s 

regulatory initiatives. We encourage the Department and the Commission to continue to work together to ensure a 

coordinated and consistent regulatory solution to target date fund disclosure. 
Via e-mail to rule-comments@sec.gov

June 9, 2014 

Mr. Kevin M. O’Neill 

Deputy Secretary 

Securities and Exchange Commission 

100 F Street, NE 

Washington, D.C. 20549-1090 

Re: Investment Company Advertising: Target Date 

Retirement Fund Names and Marketing (File No. S7-

12-10) 

Dear Mr. O’Neill: 

The Investment Company Institute (“ICI,” or the “Institute”)1 appreciates the opportunity to 

comment on the recent release2 of the Securities and Exchange Commission (the “Commission,” or the 

“SEC”) requesting additional comment related to its 2010 proposal3 to require certain disclosures in 

target date fund marketing materials.4 On behalf of our members, which are entrusted with the 

 

1

 The Investment Company Institute is the national association of U.S. investment companies, including mutual funds, 

closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). ICI seeks to encourage adherence to 

high ethical standards, promote public understanding, and otherwise advance the interests of funds, their shareholders, 

directors, and advisers. Members of ICI manage total assets of $16.8 trillion and serve more than 90 million shareholders. 

2 See Investment Company Advertising: Target Date Retirement Fund Names and Marketing, SEC Release Nos. 33-9570; 34-

71861; IC-31004 (April 3, 2014), 79 FR 19564 (April 9, 2014) (the “Release”). 

3 See Investment Company Advertising: Target Date Retirement Fund Names and Marketing, SEC Release Nos. 33-9126; 34-

62300; IC-29301 (June 16, 2010), 75 FR 35920 (June 23, 2010)(the “2010 Proposal”). 

4 We are using the term “marketing materials” in this letter to refer both to advertisements under Rule 482 of the Securities 

Act of 1933 (the “Securities Act”), and sales literature under Rule 34b-1 of the Investment Company Act of 1940 (the 

“Investment Company Act”). Securities Act Rule 156 applies to both advertisements and sales literature. Throughout this 

letter, we are referring to these three rules as the “Rules.” The 2010 Proposal and the Release also solicit comment on 

whether certain disclosures should be included in fund prospectuses, statements of additional information (“SAIs”), or 

shareholder reports. 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 2 

retirement savings of more than 50 million U.S. households,5 the Institute has been, and continues to 

be, committed to working with the Commission, the Department of Labor (“DOL”) and others to 

protect the interests of target date fund investors and enhance their understanding of these useful 

investment products6

 In 2010, we strongly voiced our support for the spirit and core of the 

Commission’s 2010 Proposal. In fact, we strongly supported its most critical element—the asset 

allocation glide path illustration. This illustration effectively communicates key pieces of information 

about target date funds to investors through a prominent table, chart, or graph conveying the changing 

asset allocation of the target date fund over the entire life of the fund, including at the target date and 

the point where the fund arrives at its final asset allocation.7 

 The Commission requested additional comment after the Commission’s Investor Advisory 

Committee (the “Committee”) recommended in April 2013 that the Commission develop a glide path 

illustration for target date funds that is based on a standardized measure of fund risk as a replacement 

for, or supplement to, the proposed asset allocation glide path illustration.8 While we too are 

committed to enhancing investor understanding of target date funds, we believe that mandating a riskbased glide path illustration would require the adoption of a single-dimensional risk standard that 

simply cannot adequately convey the multi-dimensional aspects of risk. All risk measures have certain 

inherent limitations; therefore, requiring the use of any such measure may confuse and even possibly 

mislead target date fund investors. For these reasons, we have concluded that the adoption of a riskbased glide path is counter to the Commission’s goal in proposing the Rule amendments of 

“provid[ing] enhanced information to investors concerning target date retirement funds and reduc[ing] 

 

5 See Figure A7 in Burham, Bogdan, and Schrass, Ownership of Mutual Funds, Shareholder Sentiment, and Use of the Internet, 

2013, ICI Research Perspective 19, no. 9 (October 2013), available at www.ici.org/pdf/per19-09.pdf. 

6 See, e.g., Letter from Karrie McMillan, General Counsel, the Investment Company Institute, to Elizabeth M. Murphy, 

Secretary, Securities and Exchange Commission (Aug. 23, 2010) (commenting on the 2010 Proposal, available at 

www.sec.gov/comments/s7-12-10/s71210-34.pdf) (the “2010 ICI Comment Letter”). In addition, in June 2009 the 

Institute published Principles to Enhance Understanding of Target Date Funds (the “Principles”), which reflected the results 

of the ICI Target Date Fund Disclosure Working Group project that began earlier that year. The ICI Target Date Fund 

Disclosure Working Group included representatives from a broad range of member firms, representing more than 90 

percent of target date mutual fund assets. The Working Group reviewed the then existing disclosures applicable to target 

date funds, determined that the public’s understanding of target date funds could be enhanced by identifying key pieces of 

information that should be prominently conveyed by target date funds, and developed the Principles that spell out this key 

information, which includes an asset allocation glide path illustration accompanied by narrative disclosure. The Principles 

are available at www.ici.org/pdf/ppr_09_principles.pdf. 

7 See the 2010 ICI Comment Letter. 

8 The Recommendation of the Investor Advisory Committee, Target Date Mutual Funds (adopted April 11, 2013)(the 

“Recommendation”) is available at www.sec.gov/spotlight/investor-advisory-committee-2012/iac-recommendation-targetdate-fund.pdf. On November 20, 2013, SEC Chair White sent a letter to the Committee, notifying it that the Commission 

would be seeking additional comment on standardized risk-based glide path illustrations for target date funds in connection 

with the Commission’s 2010 Proposal (available at www.sec.gov/spotlight/investor-advisory-committee-2012/chair-whiteletter-target-date-funds.pdf).
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 3 

the potential for investors to be confused or misled...”

9

 We urge that the Commission not adopt Rule 

amendments that stipulate the use of a risk-based glide path illustration for target date funds.10 Rather, 

we urge the Commission to continue with its approach to the glide path set forth in the 2010 Proposal. 

More specifically, our comments in response to the Release include the following points, all of 

which are discussed in greater detail below. 

• There is no single measure of risk on which the industry has settled. This is due to the 

complexity and multi-faceted nature of risk and the inherent limitations of any single 

measure. 

• Managers of target date funds attempt to address a variety of risks faced by individuals 

investing for retirement. In addition to return volatility risk, target date fund managers 

also consider longevity or shortfall risk (i.e., the risk of outliving one’s assets), inflation 

risk (i.e., the risk that the purchasing power of one’s assets will erode over time), and 

income replacement risk (i.e., the risk that the income provided for in retirement will 

not be sufficient). 

• Risk metrics can be helpful tools for assessing one of these risks, i.e., the potential return 

volatility risk of an investment portfolio, but a simplistic use of such measures, alone or 

in the construction of a risk-based glide path, will harm, rather than help, investors. 

Widely identified weaknesses include the limitations of historical data on which they 

are based, the challenges associated with adapting such data to a particular portfolio, 

and the inability of data to account sufficiently for market events with no historical 

precedent. 

• While a few foreign jurisdictions require or permit funds to disclose “risk rating” 

information, the use of such ratings and their underlying methodologies have been 

criticized for these and other limitations that affect risk-based metrics generally. 

• Adoption of a mandatory risk measure, either alone or in connection with the 

construction of a risk-based glide path illustration, presents several unique challenges 

when applied to target date funds, including the following: 

 

9 See 2010 Proposal, 75 FR at 35920. 

10 While the vast majority of ICI members agree with the positions expressed in this letter, we understand that at least one 

ICI member is generally supportive of the Committee’s recommendations with respect to the use of a risk-based metric as a 

supplement to the asset allocation glide path illustration.
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 4 

o A risk-based glide path focused solely on return volatility risk cannot capture all 

forms of risk to which target date funds are subject, such as inflation risk and 

longevity risk; 

o As a fund’s asset allocation changes, its risk profile also changes, and therefore it 

is not possible to take a risk statistic such as standard deviation and extrapolate 

the same risk metric out over the life of a target date fund; and 

o The limitations associated with the use of historical data are more pronounced 

for target date funds, which are composed of multiple asset and sub-asset classes 

whose weightings and representative investments change over the funds’ 

investment horizons; interpreting from data how and at what level of precision 

these varying assets correlate presents difficult challenges. 

• Investors may be confused, and may be misled, by a risk-based glide path illustration, 

because such an illustration: 

o may not be comprehensible to investors not familiar with the statistical 

concepts underpinning the glide path’s construction (e.g., standard deviation 

or beta); 

o would suggest that future levels of risk in a fund are reasonably predictable, but 

return volatility risk measures are probabilistic in nature, not exact, and 

investors likely will view the illustration as predictive of future performance, or 

even regard it as promissory in nature; 

o would not accurately reflect how most target date funds are managed; and 

o would cause investors to de-value other important investment considerations, 

such as longevity and inflation risks and return potential, which will make it 

more difficult for them to realize their retirement goals. 

• An asset allocation glide path is not only an effective proxy for return volatility risk, it 

also shows actual intended asset allocations, allowing for better glide path comparability 

among target date funds. 

• The asset allocation glide path illustration and other disclosure requirements 

contemplated in the 2010 Proposal, together with all of the information that target 

date fund investors and plan administrators currently have available, provide an 

effective and comprehensive picture of fund risk. 

• The SEC has requested comment on a complex topic with no new specific Rule 

amendments and very limited analysis. In the event that the SEC chooses to pursue 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 5 

some type of risk-based glide path, the SEC formally should propose specific new Rule 

amendments accompanied by careful analysis (including a detailed regulatory impact 

analysis). 

• In the event that the SEC chooses to pursue some type of risk-based glide path, the U.S. 

Department of Labor should impose similar rules on non-mutual fund target date 

funds and arrangements to assure that all retirement investors receive the same basic 

information about these important retirement savings vehicles. 

I. Introduction 

Asset allocation is one of the most important factors in long-term portfolio performance. 

Target date funds provide an efficient way for an investor to invest in a mix of asset classes through a 

single fund that rebalances its portfolio over time to become less focused on growth of principal and 

more focused on current income and lessening principal fluctuation. For this reason, target date funds 

have proven to be a valuable innovation for defined contribution plans and other individual retirement 

account savings vehicles. At year-end 2013, target date mutual funds had $618 billion in assets, 

including $430 billion held in defined contribution plans and another $124 billion held in IRAs.11 At 

year-end 2012, 72 percent of 401(k) plans in the EBRI/ICI 401(k) database included target date funds 

in their investment lineups, 41 percent of 401(k) plan participants had at least some portion of their 

account in these funds, and 15 percent of total assets in 401(k) plans in the EBRI/ICI 401(k) database 

was in target date funds.12 

Target date funds invest in multiple asset classes, ranging from domestic and international 

equities to corporate and government bonds and cash. To achieve the same benefits with a selfmanaged portfolio, an investor would have to select and monitor a number of individual funds and 

regularly transfer money among them. The design of target date funds avoids the extreme asset 

allocations observed in some retirement accounts. For example, some young workers invest very 

conservatively by allocating all, or almost all, of their accounts to fixed income investments, while some 

participants nearing retirement invest very aggressively, allocating all, or almost all, of their accounts to

 

11

 See Table 20 in Investment Company Institute, The U.S. Retirement Market, Fourth Quarter 2013 (March 2014), 

available at www.ici.org/info/ret_13_q4_data.xls. 

12 In an ongoing collaborative effort, the Employee Benefit Research Institute and the Investment Company Institute collect 

annual data on millions of 401(k) plan participants as a means to accurately portray how these participants manage their 

accounts. The EBRI/ICI database includes data on target date funds offered as mutual funds, collective investment trusts, 

and other investment vehicles. The EBRI/ICI 401(k) database is the largest, most representative repository of information 

about individual 401(k) plan participant accounts. The EBRI/ICI 401(k) database includes statistical information on 24.0 

million 401(k) participants, in 64,619 employer-sponsored 401(k) plans, holding $1.536 trillion in assets at year-end 2012. 

See Holden, VanDerhei, Alonso, and Bass, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2012, ICI 

Research Perspective 19, no. 12, and EBRI Issue Brief, no. 394 (December 2013), available at www.ici.org/pdf/per19-

12.pdf. 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 6 

equity investments.13 Target date funds follow professionally designed asset allocation models to 

eliminate such extremes. 

The Commission issued the 2010 Proposal in response to the market events of 2008. Most 

asset classes (with the notable exception of U.S. Treasury securities) lost value in 2008. Consequently, 

many funds (including target date funds) and investment accounts generally experienced negative 

returns. It has been observed, however, that target date funds’ use of a consistent asset allocation 

strategy positioned their shareholders to benefit from the subsequent market recovery.14 

 

The Committee’s Recommendation stems from its concern about the effectiveness of the asset 

allocation glide path as a risk measure.15 The Recommendation states that asset allocation “is a

particularly unreliable proxy for risk where the asset classes are defined quite broadly, as they are in the 

Commission proposal” and therefore requests that the Commission “develop an alternative glide path 

illustration based on the target risk level over the life of the fund.” The Committee does not offer a 

specific proposal in this regard, but suggests that the Commission “focus on factors such as maximum 

exposure to loss or volatility of returns that are directly relevant to the primary concerns of those 

approaching retirement.”16 

For the reasons set forth below, we strongly object to moving away from the asset allocation 

glide path illustration in favor of a risk-based glide path illustration. The discussion below responds to a 

number of the questions posed in the Release. 

II. Assessing a Risk-Based Glide Path 

The Release asks whether there are quantitative measures of risk that would be useful to and 

understandable by investors as the basis for a fund’s risk-based glide path illustration. Of course, this is 

not the first time the Commission has explored the possible adoption of risk-based measures for 

investment companies. In its concept release issued in 1995, the SEC requested comment on how to 

 

13 See 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2012, ICI Research Perspective 19, no. 12, and 

EBRI Issue Brief, no. 394, supra. 

14 See Morningstar, Target-Date Series Research Paper: 2013 Industry Survey (“Morningstar Survey”), at 20 (“And although 

the more aggressive tendencies of some shorter-dated funds produced unexpectedly severe losses in 2008, results since then 

have worked in favor of investors who were patient. From the pre-crisis peak in 2007 through the end of 2012, all but one of 

the currently extant 2015 funds have recouped their losses, and most have produced double-digit positive gains.”), available 

at corporate.morningstar.com/us/documents/ResearchPapers/2013TargetDate.pdf. 

15 The Committee’s stated rationale in the Recommendation regarding glide paths is similar in many respects to that offered 

in the Comment Letter of Foliofn Investments Inc. to the 2010 Proposal (Jan. 24, 2011) (the “Foliofn Comment Letter”). 

16 See the Recommendation, at 3-4. 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 7 

improve risk disclosure for investment companies,17 and noted in 1998 that “[c]omments submitted in 

response to the Commission’s Risk Concept Release asserted that investors have too wide a range of 

investment goals and ideas of what ‘risk’ means to be well served by a single quantitative risk measure. 

In addition, commenters argued that, if the Commission mandated a risk measure, investors might rely 

on it as a definitive standard despite the lack of general agreement on how to measure risk.”18

 

We believe that these important points are equally valid today, particularly with respect to 

target date funds. In our view, the absence of industry agreement on a single risk measure is not due to a 

lack of effort or ingenuity. Rather, it is due to the complexity and multi-faceted nature of risk, and the

inherent limitations of any single measure—challenges that are exacerbated with target date funds, 

given their multiple asset classes and changing asset allocations. 

A. Defining “Risk” 

As an initial matter, a proper evaluation of the relative merits of an asset allocation glide path 

illustration and a risk-based glide path illustration requires an understanding of “risk.” Risk, broadly 

and properly understood, is a multi-faceted concept. The variance in investment returns for an 

investment (e.g., standard deviation, a measure of variability around an investment’s average returns) 

provides one potential measure of risk.19 The sensitivity of an investment’s returns to those of the 

market generally (i.e., beta) would provide another potential measure of risk. In layman’s terms, these 

measures focus on the likelihood that an investment will go up and down in value relative to a base line. 

Throughout this comment letter, we will refer to the concept that these measures attempt to capture as 

“return volatility risk.” 

 Neither of these measures of return volatility risk, however, whether alone or together, fully 

captures “risk.” Investors generally, and those saving for retirement in particular, must consider and 

plan for risks beyond return volatility risk. Target date funds generally are used as retirement savings 

vehicles, and therefore their investors also consider longevity or shortfall risk (i.e., the risk of outliving 

one’s assets), inflation risk (i.e., the risk that the purchasing power of one’s assets will erode over time), 

and income replacement risk (i.e., the risk that the income provided for in retirement will not be 

 

17 See Improving Descriptions of Risk by Mutual Funds and Other Investment Companies, SEC Release No. IC-20974 (Mar. 

29, 1995), 60 FR 17172 (Apr. 4, 1995) (the “Risk Concept Release”). 

18 See Registration Form Used by Open-End Management Investment Companies, SEC Release No. IC-23064 (Mar. 13, 

1998), 63 FR 13916, 13929 (Mar. 23, 1998)(the “1998 Release”). 

19 Another risk measurement referred to in the Release is semi-variance, which can be used to measure the variability of 

returns below the average return. 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 8 

sufficient).

20

 Investing for retirement requires trade-offs between different forms of risk, and the 

manner in which these trade-offs are and should be made will depend in large part on the particular and 

varied financial circumstances of investors. 

As previously acknowledged by the Commission,21managers of target date funds attempt to 

address a variety of risks faced by individuals investing for retirement, including investment risk (i.e., 

return volatility risk), inflation risk, and longevity risk. Target date fund managers take different 

approaches to balancing these risks, and typically hold varying levels of equities, bonds, cash, and other 

types of investments in a portfolio that becomes more conservative as the fund approaches (and in some 

cases, passes) the targeted retirement date. Moreover, target date funds continue to evolve with respect

to their portfolio and risk management strategies and techniques. For instance, target date funds 

increasingly are diversifying beyond equities and bonds into new asset and sub-asset classes such as 

emerging markets, real estate, Treasury inflation-protected bonds, natural resources, and 

commodities.22

 

B. Evaluating Potential Risk Measures That Could Be Used in the Construction of a RiskBased Glide Path 

We discuss below the risk measures identified in the Release.23 We also include a summary of 

criticisms expressed regarding the various “risk-based” ratings adopted in other jurisdictions as well as a 

survey of those approaches. The clear lesson learned from this review is that, while risk metrics can 

serve a critical function when used by investors who are knowledgeable of their limitations,24 a 

simplistic presentation of these measures alone or in the construction of a risk-based glide path 

illustration raises significant concerns. 

 

20 Of course, a number of other risks may be subsumed by return volatility risk for a particular target date fund, including 

stock market risk, small- and mid-cap stock risk, foreign risk, currency risk, interest rate risk, credit risk, commodity risk, and 

asset allocation risk, among others. 

21 See 2010 Proposal, 75 FR at 35921. 

22 See Morningstar Survey, at 37. 

23 For a discussion of other potential measures of risk (e.g., Sharpe ratio, Treynor ratio, Jenson’s alpha, etc.) and their related 

limitations, see Letter from Paul Schott Stevens, General Counsel, the Investment Company Institute, to Jonathan G. Katz, 

Secretary, Securities and Exchange Commission (July 28, 1995), available at www.ici.org/pdf/7147.pdf. We believe that 

these measures of risk are susceptible to the same fundamental limitations as standard deviation, as discussed below. For a 

discussion of value at risk (VaR) and its limitations, see Andreas Krause, Exploring the Limitations of Value at Risk: How 

Good Is It in Practice?, The Journal of Risk Finance (Winter 2003), available at 

www.gravitascapital.com/Research/Risk/ValueAtRisk/VAR%20Limitations%20in%20Practice%20feb03.pdf. 

24 See infra, note 53 and accompanying text. 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 9 

1. Standard Deviation and Semi-Variance 

The Release specifically mentions and briefly describes standard deviation and semi-variance as 

risk measures before asking whether there is a particular quantitative risk measure, or group of risk 

measures, that are helpful in evaluating the risks of target date funds. It also asks whether fund investors 

would be likely to understand these risk measures and be able to use them effectively in making 

investment decisions. Standard deviation is a measure of variability around an investment’s average 

returns. While some investors no doubt find this measure useful, when applied to target date funds its 

relevance and utility for all investors is unclear. Investors may have difficulty deciphering the raw 

standard deviation figures upon which the risk-based glide path would be constructed. Specifically, 

standard deviation is used to calculate the probability that under certain circumstances a fund’s returns 

will fall within a range of its average returns approximately two-thirds of the time.25 Many investors, 

however, are not likely to understand the measure or appreciate its limitations with respect to 

predictability and precision.26 For instance, a fund that consistently loses 10 percent annually would 

have a standard deviation of zero, and investors may mistakenly view such a fund as having no risk, even 

though the negative return would leave the investor exposed to inflation, shortfall, and income 

replacement risks. 

Second, like most risk metrics, standard deviation is based on historical data. Investors, 

however, may place too much confidence in such a measure as being able to predict future performance, 

or even regard it as promissory in nature, despite accompanying disclosure to the contrary. If the 

Commission required the use of a risk-based glide path that “projected” standard deviations for future 

years, this danger would be magnified. As a result, investors may not understand that a fund in practice 

could behave very differently as a result of market conditions, changes in underlying portfolio holdings 

and the correlations in returns of those holdings. 

Third, given a target date fund’s changing asset allocations, measures of a target date fund’s 

standard deviation likely would be limited to relatively short time intervals (e.g., annualized standard 

deviation of returns). Such a relatively short-term volatility measure would not be particularly relevant

to retirement investors with long-term time horizons. We are concerned that a lack of investor 

understanding about this potential mismatch in risk measure and time horizon could hurt their chances 

of adequately saving for retirement. 

 

25 For example, if the average annual return of a fund were 15 percent and the standard deviation were 12 percent, there 

would be about a two-thirds chance that the annual return would be between 3 percent and 27 percent. There would be 

about a one-third chance that the annual return would be outside of this range. 

26 Indeed, the validity of standard deviation rests upon various conditions being satisfied. These conditions include 

constancy of the standard deviation, which history has shown to be highly variable, and a normal distribution of the fund’s 

returns, which is generally not the case. Even assuming that these conditions are satisfied, there would be a one-third chance 

that the return would be outside of the range. 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 10 

The Commission appears to grasp the inherent difficulties in using standard deviation as a basis 

for a risk measure for target date funds. In this respect, the Release asks how to address the concerns of 

investors at different points in the cycle of accumulating and distributing retirement assets This is an 

important concern, because views of and responses to risk by target date fund investors will not be 

uniform. Unfortunately, we do not believe it is possible for the Commission to select a risk measure 

that would have a high degree of relevance for differently situated investors. For example, it may be 

entirely appropriate for a relatively young investor decades away from retirement to conclude that the 

potential for increased long-term rates of return is worth taking on increased short-term volatility. The 

danger is that such an investor could be discouraged from investing in a fund with a relatively higher 

standard deviation, concluding based on a review of this single metric that the fund is “too risky.” Thus, 

if the Commission adopted standard deviation as the basis for a risk-based glide path, it implicitly 

would be encouraging many investors unwisely to favor funds with less short-term volatility, and thus 

forego potentially superior long-term fund performance. 

 

Semi-variance can be used to measure the variability of returns below the average return.27 A 

fund with a larger semi-variance has returns that are more spread out below the average return. Insofar 

as this measure presents only the downside of volatility, i.e. the extent to which returns may fall short of 

average returns, the possibility of discouraging investors from selecting funds with a larger semi-variance 

(and increased potential for long-term gains) is perhaps greater than that associated with funds with 

larger standard deviations, which at least acknowledge the upside return potential relative to average 

returns. Otherwise, the limitations and difficulties of using standard deviation described above (e.g., the 

potential to confuse investors, and the limitations of using historical data in a risk measure) equally 

apply to the use of semi-variance in constructing a risk-based glide path. 

2. Beta 

The Release also mentions and briefly describes beta, and specifically asks what issues, if any, are 

associated with the selection of an appropriate benchmark for calculating beta. Beta, i.e. the sensitivity 

of an investment’s returns to those of the market generally,28 would provide another potential measure 

of return volatility risk upon which a risk-based glide path could be constructed. Presumably, use of 

beta in this way would involve a correlation between a fund’s historical returns (or perhaps, for future 

years, those of its future expected asset classes) and those of a benchmark index. Unlike standard 

deviation, it provides a relative, rather than absolute, measure of volatility. 

 

27 By contrast, standard deviation shows variability of returns above and below the average return. 

28 The relevant market’s beta is by definition 1. A fund with a beta greater than 1 tends to move more than the market’s 

return. For example, if a fund has a beta of 2, a 10 percent market gain could be expected to result in a 20 percent fund gain, 

and a 10 percent market loss could be expected to result in a 20 percent fund loss. A fund with a beta less than 1 would 

move less than the market’s return. For example, if a fund has a beta of 0.5, a 10 percent market gain could be expected to 

result in a 5 percent fund gain, and a 10 percent market loss could be expected to result in a 5 percent fund loss. 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 11 

Beta is meaningful only in relation to an index. This presents a unique challenge for target date 

funds, which invest in a number of asset and sub-asset classes whose weightings shift over time, and for 

which there is unlikely to be an obviously appropriate index to use for this purpose. If a broad-based 

equity index were used, we would expect the risk-based glide path to show increasing divergence from 

the index, and a declining beta relative to that index, over time.29 The practical benefits of such a 

presentation for investors are questionable. Because beta is a measure of relative risk, it would not 

convey the absolute return volatility risk of either the index or the fund. This glide path would be 

useful only to those investors who already have a good sense of the absolute volatility of the index, and 

even then, they would have to, in effect, extrapolate the fund’s comparative absolute volatility from the 

illustration. 

In addition to these unique limitations and difficulties in using beta, we believe that the 

limitations and difficulties of using standard deviation described above (e.g., the potential to confuse 

investors, and the limitations of using historical data in a risk measure) equally apply to the use of beta 

in constructing a risk-based glide path. 

C. Other Jurisdictions’ Use of Risk Measures for Funds 

As discussed above, a few foreign jurisdictions require or permit funds to disclose risk rating 

information. Appendix A includes a summary of these approaches. The risk ratings for funds and their 

underlying methodologies currently in use in such jurisdictions have many of the same flaws that affect 

risk-based metrics generally, particularly when they are presented in a simplistic way. In fact, a review of 

these risk rating systems and the criticisms they have drawn readily illuminates the pitfalls of attempting 

to identify and measure risk by using a single standardized numerical score or label (e.g., “Very High 

[Risk]”), either in conjunction with the glide path or on a stand-alone basis. In our view, the risk rating 

systems described in Appendix A and below, or any variations thereof, are not appropriate for U.S.-

registered target date mutual funds (or indeed, for U.S.-registered funds generally). 

For instance, the European Securities and Markets Authority (“ESMA”) has required that all 

UCITS IV funds include the Synthetic Risk and Reward Indicator (“SRRI”) number (which ranges 

from 1 (lowest risk/reward) to 7 (highest risk/reward)) in their Key Investor Information Documents 

(“KIIDs”).30 Commentators have expressed numerous concerns with the SRRI, including, for example, 

that different sources of risk are not captured by the measure;31 that risk ratings may cause investors to 

 

29 The Foliofn Comment Letter provides examples of how such a measure s may look in application. Interestingly, these 

graphical representations do not look very different from a graphical depiction of a fund’s equity allocation over time, i.e., an 

asset allocation glide path. 

30 See infra, note 75, for a description of KIIDs. 

31 Paul D. Kaplan, PhD, Quantitative Research Director, Morningstar Europe, Ltd., What the Synthetic Risk Reward 

Indicator Doesn’t Indicate About Risk or Reward (2011), available at www.vff.no/filestore/PaulKaplanWhattheSyntheticRiskRewardIndicatorDoesntIndicateAboutRiskorReward.pdf (stating, among other things, that SRRI 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 12 

place too much emphasis on volatility and forego the opportunity to benefit from higher returns;32 and 

that, because similar types of funds tend to fall within just a couple of the risk categories (i.e., 

“crowding”), the benefits of these comparative scores are limited.33

Similarly, Australia’s use of the Standard Risk Measure (“SRM”) (which utilizes a 7-level 

classification system with risk labels ranging from “Very Low” to “Very High”), which Australian 

authorities “strongly recommended” in 2011 for Australian super funds,34 has also been criticized. 

Commentators have expressed concern that, in the determination of SRM, the size of an adverse event 

is not considered in the calculation and, rather, any negative return regardless of magnitude is treated 

the same; that the calculation methodology is subjective, creating an incentive to adopt a methodology 

resulting in a lower risk score;35 that the methodology misleadingly applies a single level of risk to any 

investment option, given that the level of risk that is undertaken by investors relates to their investment 

timeframes and objectives, which will vary; that annual volatility, which is what SRM measures, is not 

the only risk and is much less of a risk for younger investors than inflation/adequacy; and that SRM 

reinforces short-term thinking and investing through its focus on volatility in annual returns.36 

Finally, Canadian fund managers are required to provide risk ratings (based on a 5-level scale 

ranging from “Low” to “High”) for mutual funds in their Fund Facts.37 As with Australia’s SRM, 

Canada’s current approach has been criticized for, among other things, the subjectivity of the 

methodology used.38 

 

does not adequately capture certain sources of risk (e.g., market risk, active risk, and currency risk), and that the possibility of 

extreme events is not revealed). 

32 Alex Hoctor-Duncan, Head of Retail in Europe, the Middle East and Africa for BlackRock, Crouching Tiger Hidden 

Danger, Strategic Solutions Magazine Q1-2 2012 issue, available at www.blackrockinternational.com/public/enzz/literature/brochure/strategic_solutions_crouching_tiger.pdf. 

33 Ed Moisson, Head of UK & Cross-Border Research, Lipper, and Kevin Pollard, Research Analyst, Methodology, Lipper, 

SRRI European Overview (May 2012), available at 

share.thomsonreuters.com/PR/Lipper/Reports/Lipper_SRRI_European_May2012.pdf. For the period studied, 94.5% of 

equity funds had a risk rating of 6 or 7, and 74.4% of bond funds had a risk rating of 3 or 4. 

34 See infra, note 78, for a description of superannuation and Australian super funds. 

35 David Bell, Is APRA’s Standard Risk Measure Helpful? (Feb. 20, 2013), available at www.cuffelinks.com.au/is-aprasstandard-risk-measure-helpful/?COLLCC=2680257826. 

36 Australian Institute of Superannuation Trustees, APRA Discussion paper, Reporting Standards for Superannuation

(November 2012), available at www.aist.asn.au/media/11489/2012.11.16_APRA_DP_Reporting_Standards.pdf. 

37 See infra, note 81, for a description of the Canadian Fund Facts. 

38 See Canadian Securities Administrators (“CSA”) Notice 81-324 and Request for Comment—Proposed CSA Mutual Fund 

Risk Classification Methodology for Use in Fund Facts, in which the CSA noted that it had received feedback from 

stakeholders indicating that a standardized risk classification methodology would be more useful to investors as it would 

provide a consistent and comparable basis for measuring the risk of different mutual funds. 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 13 

D. Limitations of Risk-Based Measures Are Magnified When Applied to Target Date Funds 

In light of their limitations and difficulties discussed above, we oppose mandatory risk metrics 

being used either alone or in connection with the construction of a risk-based glide path. For the 

reasons set forth below, mandatory risk metrics are particularly unsuitable and problematic to 

implement (in the form of a risk-based glide path or otherwise) for target date funds. 

1. Conventional Risk Measures Do Not Work for Target Date Funds 

As acknowledged by the SEC, a target date fund’s asset allocation changes throughout the 

fund’s investment horizon (i.e., its glide path) until it reaches a “landing point” at which the asset 

allocation generally becomes static.39 As a fund’s asset allocation changes, its risk profile also changes. It 

therefore is not possible to take a risk statistic such as standard deviation, calculated over a set period 

based on a given asset allocation at a point in time, and extrapolate the same risk metric out over the life 

of a target date fund. In addition, the plotting of changing risk indicators over specific points on the 

glide path (e.g., the starting point, retirement date and landing point) would be problematic. In 

particular, it would not directly address the return volatility risk of the target date fund over its entire 

investment horizon or, for example, the impact that taking on greater return volatility risk in the early 

years of the glide path would have on the fund’s ability to increase its returns over its entire investment 

horizon. 

Another difficulty in applying risk-based measures to target dates funds relates to the limitation 

of historical data and challenges in adapting such data to a specific target date fund portfolio. As noted 

above, all risk metrics use historical data to make assumptions about future risk, and history may not be 

a reliable predictor of future markets nor sufficiently account for major, unforeseen market events with 

no historical precedents (e.g., 2007–2008 market events). Beyond these obvious limitations, target 

date funds are composed of multiple asset and sub-asset classes whose weightings and representative 

investments will change over time. Interpreting from data how and at what level of precision these 

varying assets correlate presents potentially unknowable challenges—particularly as target date funds 

diversify beyond equities and bonds and seek exposure to new asset and sub-asset classes such as 

emerging markets, real estate, natural resources and commodities. And complicating matters further, 

aside from these contemplated changes in asset allocation (i.e., expected movements along the glide path 

over time), a target date fund’s asset allocation glide path itself will not necessarily remain fixed. In this 

respect, consistent with disclosure in their prospectuses, funds often reserve the right to deviate from 

the future asset allocation percentages identified in seeking to meet the funds’ investment objectives.40

 

 

39 See 2010 Proposal, 75 FR at 35921. 

40 For example, by policy a target date fund may be permitted to deviate +/- 5 percent from the asset allocation percentages 

reflected in its asset allocation glide path. 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 14 

Given the inherent limitations in applying a conventional risk measure to target date funds 

with changing asset allocations, we expect that some commenters might recommend the use of 

stochastic modeling, such as Monte Carlo simulation techniques,41 in connection with the construction 

of a risk-based glide path. While fund sponsors can and do use such techniques to help them gauge the 

probability of achieving a desired return and construct asset allocation glide paths, there is no industry 

wide standard for doing so. Minor changes to the inputs and assumptions used can cause wide 

differences in the results.42 The potential for inconsistent inputs and assumptions is a significant 

impediment to systematic, rigorous analysis across target date funds. Additionally, the use of such 

techniques necessitates value judgments regarding, among other things, the periods along the glide path 

during which investors are best able to respond to return volatility risk and at what levels. The SEC 

could as a theoretical matter consider the adoption of a standardized approach to the use of such 

techniques, but, to actually implement such an approach in practice, it would need to make a series of 

technical decisions and value judgments regarding, among other things, the level of specificity required 

for inputs associated with asset classes, sub-asset classes and statistical correlations among such assets, 

and the number of simulations to be used.43

 

Finally, the challenges in applying risk-based metrics to target date funds identified above apply 

regardless of whether the metric is backward-looking or forward-looking.44 While one could argue that 

a backward- looking metric is not inherently speculative in the way that forward-looking metrics are,45 a 

backward-looking metric would be particularly ill-suited for use with a target date fund in light of such

fund’s changing asset allocation. For instance, suppose a fund with a target retirement date of 2050 

launched in 2010. It would have just over four years of actual performance—or backward-looking 

 

41 For a discussion of Monte Carlo techniques, see Roger Eckhardt, Stan Ulam, John von Neumann, and the Monte Carlo 

Method, Los Alamos Science, Special Issue (15), 131-137 (1987). See also Risk Analysis in Capital Investment, Harvard 

Business Review (Sept. 1, 1979). 

42 See Allen Roth, Is Financial Monte Carlo Simulation Dead?, Money Watch (Feb. 22, 2010). 

43 In this respect, the Release requests comment on whether required risk measures, if adopted in final rules, should be based 

on a standardized methodology or methodologies developed by the Commission. If the SEC were to pursue a risk-based 

glide path, it would either: (i) have to set forth, in a very detailed and prescriptive way, how funds would construct their glide 

paths, which would require the SEC to make a number of technical and value-based policy choices, or (ii) allow funds 

discretion in creating a methodology for constructing their glide paths, which would introduce a subjective “black box” 

element to their construction and make comparability between target date funds impossible (indeed, the Canadian 

Securities Administrators have recognized similar concerns with its current risk rating system). We oppose either of these 

general means of construction, and the attendant flaws of each further call into question the benefits and value of the end 

result, i.e., the risk-based glide path.

44 The Release asks whether a risk-based glide path illustration should be backward-looking (showing past actual risk 

measures of a target date fund or group of target date funds) or forward-looking (showing projected risk targets for a target 

date fund or family of target date funds). 79 FR at 19567. 

45 See Appendix A and compare the risk rating approaches taken in Europe and Australia. 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 15 

data—on which to gauge the potential risk of the target date fund with an investment horizon of 

several more decades and with asset allocations that will change over time. 

 

2. Target Date Fund Investors May Be Confused and Potentially Misled by Risk 

Metrics 

The Release asks whether investors in target date funds would be likely to understand risk 

measures, or any related illustrations based on those measures. In addition to the difficulties with 

applying conventional risk measures to target date funds described above, we believe that the investors 

who are the focus of the Commission’s rulemaking would have difficulty understanding and may be 

misled by a risk-based glide path illustration. The market for target date funds consists largely of 

investors saving through retirement plans or retail investors investing through IRAs.46 The decision to 

make a particular target date fund available through a plan is generally made by plan fiduciaries who 

may be presumed to be more sophisticated and knowledgeable than investors generally. But, like many 

investment professionals who were said to have relied too heavily on risk metrics in failing to gauge the 

severity of the financial crisis in 2007–2008,47 even sophisticated investors can be susceptible to 

overreliance on risk metrics. 

Target date fund investors are not necessarily knowledgeable enough to recognize the 

limitations of risk metrics and likely would place too much confidence in such metrics. In this respect, 

presented on its own or as an indicator on a glide path, a risk metric would imply a level of precision and 

reliability that is unwarranted. Simply providing, say, a backward-looking measure of a fund’s return 

volatility risk such as standard deviation could lead investors to assume that the numbers presented are 

intended to represent a true indication of future volatility. Insofar as a risk-based glide path would also

project risk in future years, the dangers of overreliance and overconfidence are compounded. 

The Release asks whether target date fund strategies are based on a changing target risk level or 

a changing target asset allocation over time, or some combination of these approaches. Based on our 

review of our members’ practices, most target date funds do not construct a risk-based glide path based 

on a risk metric and manage to it over time. Consequently, the imposition of a risk-based glide path 

would be something of a forced construct for most funds, and would give the impression, misleading in 

most cases, that the funds were being managed to a single, targeted risk metric and not an optimized 

risk/return goal, as is more likely the case, and for which the asset allocation glide path is better suited. 

Thus, the inclusion of a risk-based glide path may confuse and potentially mislead investors about how 

most target date funds are managed.48 

 

46 See supra, note 11 and accompanying text. 

47 See Joe Nocera, Risk Management, The New York Times Magazine (Jan. 2, 2009). 

48 The Release also asks whether a risk-based glide path illustration should be required only for target date funds with an 

investment objective or strategy of managing to a target risk level. We believe that it should not, because even for those 

funds that do manage to a target risk level, a mandated risk-based glide path illustration may not reflect the way any 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 16 

The Release asks whether disclosure of risk measures could influence investors to choose lower 

or higher risk investments than would be consistent with their goals for accumulating retirement assets. 

We are concerned that investors reviewing risk-based glide path illustrations may reach wrong 

conclusions. For example, in side-by-side comparisons, lower-volatility funds (e.g., those with relatively 

heavy allocations to bonds and/or cash) may “look better” than higher-volatility funds, but the former 

could be inappropriate for certain investors and subject them to increased longevity risk and inflation 

risk and cause them to forego potentially superior returns. The Release asks whether the inclusion of 

two glide path illustrations (i.e., both asset allocation and risk-based glide paths) in the same document 

would tend to confuse investors. We believe that it would. Placing a risk-based glide path next to the 

asset allocation glide path would add little to investors’ understanding of a fund’s overall risk profile 

and, for the reasons discussed above, could confuse and/or mislead investors. Investors may also be left 

wondering how, if at all, the two illustrations are meant to complement one another. 

Presumably aware of the potential for confusion,49 the Commission asks whether a required 

explanatory statement preceding or accompanying the risk-based glide path illustration would be 

 

particular fund is managed, and in any event such disclosure would still be subject to the same weaknesses discussed 

elsewhere in this letter. 

However, we distinguish a risk-based glide path of the type recommended by the Committee from those that are not 

intended to project future fund performance or risk. For example, we understand that some members use “volatility targets” 

as part of their investment strategies and may therefore wish to disclose a volatility target glide path (e.g., a fund may seek to 

target a specific level of volatility, with such target levels declining over time). Such a glide path is distinguishable from the 

type recommended by the Committee in that it identifies a risk target to which the fund seeks to be managed, but does not 

attempt to project future fund performance or risk. See infra note 51, explaining that our concerns do not extend to such 

type of disclosure. At the same time, consistent with our view that funds should not be required to disclose a risk-based glide 

path, we believe that funds that use non-predictive measures or targets in managing their funds should not be required to 

provide glide path illustrations of such measures or targets. 

49 In this same vein, the Release asks whether forward-looking disclosures such as projected future volatility (or other risk 

measures) or expected returns give rise to potential liability concerns. We believe they do and, if the SEC were to pursue this 

course, it would have to be mindful of the forms of liability to which funds and certain of their related persons could be 

subject by complying with any new Rule or Form requirements. For instance, under Sections 11(a) and 12(a)(2) of the 

Securities Act, investors who purchase shares of a mutual fund while the fund’s registration statement contains a material 

misleading statement have broad legal recourse (because Rule 482 advertisements are “prospectuses,” they would also be 

subject to liability under Section 12(a)(2)). From a disclosure and liability perspective, requiring a target date fund to 

project future levels of risk is far more problematic than requiring such a fund to project future asset allocations, because the 

former is much harder to predict and control. Consequently, we strongly recommend that the SEC implement measures to 

shield from liability funds that make such future risk projections in good faith that turn out to understate actual, realized 

fund risk. The Commission has precedent for using its authority to shield from potential liability certain forward-looking 

information that registrants are required to provide. See, e.g., Item 303(c) of Regulation S-K (applying the safe harbor 

provided in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) 

to forward-looking information related to off-balance sheet arrangements and certain contractual obligations contained in 

the “Management's Discussion and Analysis” section of a registrant's disclosure documents) and Disclosure in Management's 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 17 

helpful to investors (which, among other things, could explain that certain risks are not captured by the 

illustration). Prophylactic disclosure about these additional risks would be difficult to accommodate in 

advertising materials, and would not adequately temper the message from the illustration in any event. 

In this way, a risk-based glide path could detract from, rather than improve, decision-making and 

jeopardize the achievement of retirement goals. We also do not think that the difficulties associated 

with a risk-based glide path could be cured if the illustration were placed in the prospectus, SAI, or 

shareholder report instead of marketing materials.50 The only potential benefit to doing so is that there 

would likely be more space to describe the illustration and its limitations. But as mentioned above, we

do not believe that any prophylactic disclosure will sufficiently counterbalance the message delivered by 

the illustration. Otherwise, the arguments made above against the risk-based glide path’s mandated 

inclusion in marketing materials equally apply to its inclusion in the prospectus, SAI, or shareholder 

report. 

The Release notes that some target date funds already provide quantitative risk measures in 

certain materials on a historical basis. Such funds are doing so on a voluntary basis. We believe there is

an important distinction between risk information that is permitted and provided by certain funds 

voluntarily (and that is still subject to meeting a general standard of not being misleading) and 

information that the SEC requires.

51 The latter would have the SEC’s de facto imprimatur and would 

be elevated in importance (especially given that it would be presented in graphic form), and therefore 

runs the risk of taking on a heightened level of importance in the minds of investors. While the 

limitations associated with risk-based metrics make them inappropriate for mandated use in marketing 

materials and other required disclosure materials, we recognize that risk-based metrics can be useful in 

explaining how a target date fund’s glide path or portfolio holdings are intended to help the fund 

achieve its investment objectives. As the Commission is aware, most target date funds are selected as 

investment options in employer-provided retirement plans. In connection with the selection of a 

particular target date fund for a plan, plan fiduciaries are required under ERISA to obtain information 

that will enable them to evaluate the prudence of any target date funds they are considering, including 

information regarding investment strategies and glide paths which may impact the way in which a 

target date fund performs.52 In many cases, target date fund providers provide this information to, and 

review it with, plan fiduciaries and their investment consultants. Notably, the SEC staff has recognized 

 

Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations, SEC Release 

Nos. 33-8182, 34-47264 (Jan. 28, 2003), 68 FR 5982 (Feb. 5, 2003).

50 The Release asks about appropriate potential locations for the risk-based glide path illustration. 79 FR at 19576. 

51 It is important to note that our concerns with the mandated use of risk metrics do not extend more generally to funds 

that use or disclosure of volatility targets as part of their investment strategies. See supra note 48, explaining that funds 

that identify volatility targets as part of their investment strategies consider the targeted glide path as an express part of the 

funds’ strategies, but not a measure or projection of future fund risk.

52 See the DOL’s Target Date Retirement Funds—Tips for ERISA Plan Fiduciaries, available at 

www.dol.gov/ebsa/pdf/fsTDF.pdf. 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 18 

in certain circumstances a distinction between customized information, which is intended for 

sophisticated investors (e.g., wealthy individuals, pension funds, universities, and other institutions that 

have sufficient assets to justify the cost of a one-on-one presentation), and information intended for 

investors generally.53 Here too, while risk metrics can serve as useful tools in target date fund selection 

and oversight, the potential for overreliance on their predictive qualities or for making investment 

decisions makes their mandated use in disclosure materials problematic. 

Finally, risk-based glide paths would require projections of risk in future years, which is 

potentially inconsistent with FINRA’s public communications rules54 and their underlying policy 

rationale. To fully explain the glide path, its underlying assumptions and limitations, FINRA could 

require lengthy explanations and/or footnotes, which would pose an additional obstacle to investor 

comprehension and would certainly detract from the clarity of the presentation. 

In the 2010 Proposal, the SEC stated that its main objective in proposing the Rule amendments 

was to “reduce the potential for investors to be confused or misled regarding [target date funds] and 

other investment companies.”55 In this regard, given the difficulty that investors would have in 

understanding the information conveyed and the possibility that they would be misled, a risk-based 

glide path would represent a major step back from the asset allocation glide path contemplated in the 

2010 Proposal.56

III. Assessment of the 2010 Proposal 

In addressing the Committee’s criticisms of the asset allocation glide path, it is important to 

assess how the disclosures described in the 2010 Proposal in their entirety, together with other 

 

53 See Investment Company Institute, SEC No-Action Letter (pub. avail. Sept. 23, 1988) (stating that the SEC staff would 

not recommend enforcement action to the Commission if an investment adviser provides prospective clients with 

performance results for advisory accounts on a “gross basis” (i.e. without deducting advisory fees or other expenses paid by 

clients) in a one-on-one presentation as described in the letter, provided certain conditions are satisfied). 

54 FINRA Rule 2210(d)(1)(F) generally prohibits communications that make unwarranted forecasts. In addition, Securities 

Act Rule 156(b)(2) provides that representations about past or future investment performance could be misleading because 

of statements or omissions made involving a material fact, including situations where representations, whether express or 

implied, are made about future investment performance. 

55 See 2010 Proposal, 75 FR at 35920. 

56 The Release asks whether radio and television advertisements should be required to include information about a target 

date fund’s risk-based glide path. In the 2010 ICI Comment Letter, we supported the Commission's decision not to apply 

the asset allocation glide path illustration requirement to radio or television advertisements, noting that it would be 

difficult, if not impossible, to convey this information effectively in those media and could result in substantially increased 

costs for additional advertising time. Our views on this are unchanged, and would apply with even greater force to a riskbased glide path, which is much more difficult to understand. 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 19 

information that investors and plan administrators currently have at their disposal, will enhance 

investor understanding of target date funds. 

A. The Committee’s Recommendation 

The Committee questions the use of an asset allocation glide path illustration as a proxy for 

risk. The Committee’s Recommendation begins by acknowledging that “[m]uch of those differences in 

risk [i.e., differences in returns in 2008 and 2009 among funds with a 2010 target date] can be 

explained by differences in the asset allocation models and glide paths used by different funds, as 

different target-date funds with the same target dates may pursue vastly divergent investment 

strategies.” The Recommendation notes that “choices of assets within the various asset classes, inclusion 

of assets from outside the traditional asset classes, and other risk management practices can also have a 

significant impact on fund risk levels.” The Recommendation then concludes on this issue: “A glidepath illustration based solely on asset allocation is therefore unlikely to reliably capture potentially 

significant differences in fund risk levels. Asset allocation is a particularly unreliable proxy for risk 

where the asset classes are defined quite broadly, as they are in the Commission proposal.”57 In response 

to this critique, the Release asks whether the proposed asset allocation glide path illustration, without a 

risk-based glide path illustration, would adequately convey risk information to investors. 

Evidence indicates that, in 2008, a broad asset allocation glide path (i.e., one showing a fund’s 

investments in stocks and bonds only) would have provided effective information to investors in funds 

near their target dates. Appendix B presents results of a statistical analysis that seeks to explain the 

2008 returns of individual target date funds. It is based on what investors knew from data that were 

publicly available in 2007 about the percentages of these funds’ assets that were held in stocks and in 

bonds. The results indicate that very basic asset allocation information explains most of the wide 

variability in the 2008 returns of target date funds had investors known in 2007 how stock and bond 

markets would behave the following year. 

From this analysis, two conclusions can be drawn. First, to the extent investors in 2010 target 

date funds were surprised in 2008 by the performance of their funds, it most likely reflects an 

unawareness that funds near to their target retirement dates may still hold a significant portion of their 

assets in stocks or other securities that are more volatile than, say, U.S. government bonds. 

Second, any measure intended to highlight to investors the range of returns they might 

experience will heavily depend on actual market outcomes. In years when the stock market declines, 

those target date funds with heavier allocations to stocks may experience unfavorable returns. 

Alternatively, in years when the bond market declines but the stock market advances, such as in 2013, 

these same funds would experience favorable returns. Thus, the perceptions that investors form of their 

target date funds will depend in large part on specific stock and bond market outcomes. This illustrates 

 

57 See the Recommendation, at 3. 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 20 

a difficulty that could arise from a risk-based glide path: presumably, a fund with a heavy allocation to 

fixed income securities would be seen as “less risky,” but in a year such as 2013 such a fund might 

nevertheless surprise its investors because of muted or even negative returns. 

The Institute’s analysis suggests that even a simple asset allocation glide path illustration (e.g.,

one showing only equities, bonds, and cash) can effectively explain fund performance (after the fact), 

and conveys useful information about a target date fund’s overall risk profile and return potential. 

While the Committee is correct that a more granular asset allocation glide path illustration (e.g., one 

showing sub-asset classes such as domestic and international equities and bonds, or alternative asset 

classes) would be a better proxy for return volatility risk, our research suggests a diminishing predictive 

return when additional variables are considered in the form of sub-asset classes or alternative asset 

classes. We are concerned that a more elaborate asset allocation glide path could reduce the clarity and 

understandability of the presentation, thereby outweighing the benefits of increased granularity. In 

other words, there are trade-offs between the amount of detail that can be captured in this type of 

presentation and its clarity and understandability, especially for those investors who are the focus of the 

Commission’s concern. 

B. Evaluating the Asset Allocation Glide Path Illustration 

Beyond conveying useful information about a target date fund’s overall risk profile and return 

potential, the asset allocation glide path illustration offers a number of other benefits, especially in 

comparison with a risk-based glide path. First, asset allocation glide path illustrations, combined with

narrative disclosures that help investors to infer levels of risk from an asset allocation glide path, convey 

critical information about both the funds’ future investments and their investment risk profiles in an 

easy-to-understand format. An asset allocation glide path illustration conveys important information 

about a fund’s overall risk profile and return potential without implying that it is possible to actually 

predict it. For instance, an investor could look at an asset allocation glide path illustration of a fund 

with a relatively heavy allocation to equities and infer that the fund places more emphasis on return 

generation and managing longevity and inflation risk, and less emphasis on minimizing short-term 

volatility. By contrast, a risk-based glide path may not be comprehensible to investors not familiar with

statistical concepts upon which it would be constructed, such as standard deviation, beta, or whatever 

other risk-based alternative may be chosen. We believe that those investors who are the focus of the 

Commission’s concern are far more likely to understand the basic risk characteristics of stocks, bonds 

and cash, and what a reduction of the stock allocation over time means for a fund’s overall risk profile. 

Second, target date fund managers more commonly (when looking at overall assets of target 

date funds or the overall number of funds) construct a targeted asset allocation and manage to it over 

time, rather than construct a risk-based glide path based on a risk metric and manage to it over time. 

Consequently, an asset allocation glide path illustration better reflects how most portfolio managers 

think about and manage their funds. We would caution the Commission against placing too much 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 21 

emphasis on the distinction between the two management approaches. Even for funds that are 

managed to an asset allocation glide path, risk considerations (broadly understood to include, e.g., 

return volatility risk, inflation risk, longevity risk and income replacement risk) are a critical component 

in the construction and continuing evaluation of the asset allocation glide paths and the selection of 

investments in building portfolios. 

Third, an asset allocation glide path illustration shows actual intended asset allocations, and 

therefore allows for better glide path comparability among target date funds than would a risk-based 

glide path. A risk-based glide path can be based only on predictive measures of volatility in future years, 

over which portfolio managers have far less control than a fund’s asset allocation. 

C. Other Information Complements the Asset Allocation Glide Path 

In addition to the asset allocation glide path, the 2010 Proposal requires a statement 

summarizing key features of the fund, including the importance of considering the investor’s risk 

tolerance, personal circumstances, and complete financial situation, as well as a statement that an 

investment in the fund “is not guaranteed and that it is possible to lose money by investing in the 

[fund].”58 This information, together with all of the information that target date fund investors and 

plan administrators currently have at their disposal, provides a comprehensive and multi-faceted picture 

of fund risk. 

Investors and plan administrators receive, or have ready access to, risk information in 

prospectuses,59 SAIs,60 shareholder reports,61 and marketing materials. Prospectuses and SAIs contain 

detailed narrative risk disclosure, and shareholder reports (through, e.g., management’s discussion of 

fund performance) include (often more topical) risk information as well. In addition, the performance 

bar charts in fund prospectuses62 and summary prospectuses and the performance “line graphs” in 

annual reports present useful and intuitive graphic measures of risk. The bar chart requirement is 

intended to illustrate graphically the variability of a fund’s returns and thus provide investors with an 

 

58 See 2010 Proposal, Proposed Rule 482(b)(5)(ii). 

59 See Items 4(b) and 9(c) of Form N-1A. 

60 See Items 16(b) and 17(b) of Form N-1A. 

61 See Item 27(b)(7)(i) of Form N-1A. 

62 A target date fund (or any other mutual fund) that has annual returns for at least one calendar year is required to include 

in its prospectus (i) a bar chart showing the fund’s annual total returns for each of the last 10 calendar years (or for the life of 

the fund if less than 10 years), (ii) the fund’s highest and lowest returns for a quarter during the 10 years or other period of 

the bar chart, and (iii) a brief explanation of how the information illustrates the variability of the fund’s returns. See Item 

4(b)(2) of Form N-1A. 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 22 

idea of its risk.63 Accordingly, target date fund investors currently receive a graphical illustration of 

return volatility risk. The bar chart’s virtues are that it (i) includes information that investors already

understand (calendar year returns), (ii) shows sequential year-by-year returns (positive or negative) in a 

fashion that also demonstrates intuitively how a fund’s returns have varied historically (e.g., dramatic 

changes in the year-to-year returns of a fund would lead investors to conclude that the fund has highly 

variable returns and high short-term return volatility risk), and (iii) consists entirely of historical, fundspecific, verifiable data. A risk-based glide path cannot claim likewise. The asset allocation glide path 

illustration contemplated in 2010 Proposal for marketing materials would effectively complement this 

currently available information. 

With respect to the asset allocation glide path illustration, the Release asks whether the 

Commission should specify the particular asset categories required to be shown, and if so, how narrow 

those asset categories should be. Many target date fund managers use an asset allocation glide path that 

presents the fund’s asset allocation in a more granular fashion. Such granularity is typically presented to 

differentiate a particular fund from others in the market generally, and is usually accompanied by a 

narrative description of the relevance of the additional asset classes depicted to the investment strategy 

of the fund. For example, depicting allocations to alternative asset classes, including real estate and 

commodities, might be relevant to an investment strategy focused on minimizing return volatility risk. 

Similarly, a more granular depiction within asset classes, e.g., equities, might be used together with a 

narrative description to explain a manager’s position that the types of equities held by the fund are 

relevant in ascertaining a fund’s expected volatility.64 In such circumstances, we agree that a more 

granular glide path illustration can be helpful in conveying additional useful information. As we noted 

in our 2010 comment letter, we support the Commission’s flexible approach in the 2010 Proposal in 

not prescribing asset classes (in part to accommodate the strategies of funds seeking exposure to 

alternative asset classes such as commodities and real estate)65 and continue to believe that the antifraud 

rules under the federal securities laws, FINRA public communications rules, and FINRA review of 

 

63 See the 1998 Release. The SEC adopted the bar chart after determining that investors needed improved disclosure about 

the risks of investing in a fund. Interestingly, the SEC was careful even when adopting this new disclosure requirement to 

place it in proper context: “In adopting the bar chart requirement, the Commission does not mean to suggest that all, or 

even a significant portion of all, fund investors equate variability in a fund’s returns with the risks of investing in the fund. 

As discussed below, the Commission acknowledges that investors have a wide range of ideas of what ‘risk’ means.” See n.52 

of the 1998 Release. 

64 For example, a fund’s allocations to relatively low volatility equities like blue chip stocks might be highlighted. 

65 In the 2010 Proposal, the Commission proposed requiring disclosure of asset allocation among “types of investments” and 

clarified that “types of investments” would mean the underlying asset classes in which the target date fund invests, whether 

directly or through other funds (i.e., target date funds would have to “look through” any underlying funds). The 2010 ICI 

Comment Letter urged the Commission to reexamine this proposed approach, because requiring funds to use the lookthrough approach would add little to enhancing understanding of the fund for most investors, and could be difficult 

to accomplish in marketing materials (e.g., underlying funds could be unaffiliated, making this information harder to 

obtain). 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 23 

marketing materials provide ample protection for investors from misleading presentations of asset 

allocations.66 

In cases where a fund opts to use a simpler asset allocation glide path illustration—perhaps due 

to concerns that the increased granularity would complicate the illustration—investors and plan 

fiduciaries would still be able to obtain a more detailed view of the fund’s asset allocation by reviewing 

portfolio holdings information. This information must be provided to shareholders and/or filed with 

the SEC at least quarterly (many funds voluntarily disclose portfolio holdings information more 

frequently on their websites).67 Funds may also be reluctant to be more granular in their asset allocation 

glide paths because they may not be able to project with specificity and confidence how much they 

intend to invest in sub-asset classes (e.g., international equities or corporate bonds) twenty or thirty 

years into the future. This makes the construction of a granular glide path in future years a more 

speculative exercise. 

IV. Process Considerations in Connection with the Release 

The 2010 Proposal contained specific proposed Rule amendments. The specificity of the 

amendments and the accompanying detailed discussion in the 2010 Proposal provided the public with a 

specific proposal to consider and upon which to provide comment. The Release, on the other hand, 

takes a much different approach. It provides background concerning target date funds and summarizes 

the 2010 Proposal and the Committee’s Recommendation, and then raises a series of questions, 

designed to assist the SEC in determining whether it should develop a risk-based glide path illustration 

either as a replacement for, or supplement to, the asset allocation glide path proposed in 2010. On the 

subject of the costs and benefits associated with the adoption of a standardized risk measure, the Release

is similarly open-ended, and consists almost entirely of a series of questions. 

This approach taken in the Release would be highly insufficient as a prelude to final rulemaking 

given that (i) the subject of investment risk is exceedingly complex, (ii) there is likely to be strong 

disagreement, as indicated by our comments here, that substantial changes to the glide path 

contemplated in 2010 are warranted, and (iii) the Committee’s Recommendation itself was not specific 

with respect to the manner in which the risk-based glide path should be constructed. Indeed, the 

Release is reminiscent in many ways of the SEC’s Risk Concept Release. In addition to the substantial 

overlap in subject matter, each of the Risk Concept Release and the Release provided some background 

and raised a number of important questions, but did not propose amendments to rules or forms. As 

noted in the Release,68 the SEC received over 3,700 comment letters in response to the Risk Concept 

 

66 FINRA Rule 2210 requires, among other things, that mutual fund retail communications be based on principles of fair 

dealing and good faith, be fair and balanced, and provide a sound basis for evaluating the facts of any particular security. 

67 See Sections 30(b) and (e) of the Investment Company Act and Investment Company Act Rules 30b1-5 and 30e-1. 

68 See the Release at n.20. 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 24 

Release, and the SEC concluded that “commenters did not broadly support any one risk measure, and 

the Commission acknowledged that investors have a wide range of ideas of what ‘risk’ means.”69 

Following the issuance of the Risk Concept Release and after considering all comment letters received 

in response, the SEC proposed that a fund’s prospectus include a bar chart showing the fund’s annual 

returns for 10 calendar years, and noted that over 75 percent of individual investors responding to the 

Risk Concept Release favored a bar chart presentation of fund risks.70

 The Commission subsequently 

adopted the bar chart requirement, which was intended to illustrate graphically the variability of a 

fund’s returns and thus provide investors with some idea of the risk of an investment in the fund.71 

We believe that the SEC acted prudently in publishing a Risk Concept Release as a first step in 

the consideration of whether to adopt a risk metric: It carefully reviewed the comment letters it 

received; considered how mutual fund risk disclosure could be improved in light of those comments; 

subsequently proposed specific amendments to Form N-1A (including the bar chart proposal) and 

invited additional comment; and then adopted amendments to Form N-1A (adopting the bar chart, 

among other changes), with some modifications. 

In the event that the SEC concludes, as we have, that it should adopt a glide path much closer 

to that proposed in 2010 (i.e., an asset allocation glide path) rather than that outlined by the 

Committee (i.e., a risk-based glide path), then we would expect that its rulemaking could follow the 

normal course, and the SEC’s next release on the subject could contain finalized Rule amendments. 

If, however, the SEC decides to pursue a risk-based glide path requirement, either as a 

replacement for or supplement to the asset allocation glide path, then the SEC must first formally 

propose new specific Rule amendments and include in the proposing release a detailed regulatory 

impact analysis.72 Such an approach would be similar to the procedural approach taken following the 

 

69 Id. See also 1998 Release. 

70 See Registration Form Used by Open-End Management Investment Companies, SEC Release No. IC-22528 (Feb. 27, 1997), 

62 FR 10898, 10904 (Mar. 10, 1997). 

71 See 1998 Release, at 13922. 

72 In the 2010 Proposal, the SEC asked whether target date fund marketing materials should be required to disclose a risk 

rating based on a scale or index that could be compared to other target date funds; if so, how the scale or index would be 

designed; and whether the scale or index should reflect only investment risk, or also longevity and/or inflation risk. Those 

inquiries were not a point of emphasis in the 2010 Proposal (they were not part of the proposed Rule amendments), and not 

surprisingly, the 2010 Proposal’s cost/benefit analysis section did not address the possibility of the final Rule amendments 

acting on them in some way. In the Release, the SEC noted that the comments received to its queries in the 2010 Proposal 

about risk ratings were “limited.” In response to these queries, the 2010 ICI Comment Letter stated that creating such a 

rating would be an enormous undertaking with questionable benefit significantly that was beyond the scope of the 2010 

Proposal. We urged the Commission first to study comprehensively the utility of any such measure, and recommended that 

the Commission take into account the risk information already being provided to fund investors in the risk/return section 

of prospectuses. 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 25 

issuance of the Risk Concept Release and is crucial to ensuring that interested parties are provided with 

an adequate opportunity to fully address (and for the SEC staff to fully consider) any concerns 

associated with any risk-based indicator. The Recommendation and the Release are undeveloped on 

the actual risk-based measure that might ultimately be adopted, and therefore comments in response to 

the Release will necessarily be incomplete, broad, and somewhat speculative. Even informed investors 

and market participants that read the Recommendation and Release will have difficulty picturing 

exactly what a risk-based glide path illustration might look like, literally and figuratively—particularly 

as applied to a target date fund with a changing asset allocation. The SEC must issue a new proposal to 

address more thoroughly issues such as how liability concerns would be allayed if funds were required to 

provide future projections of volatility (e.g., we would expect such a release to address the extent to 

which the methodology for constructing the risk-based glide path would be standardized and, if any 

element of constructing the glide path involved some measure of discretion, how the SEC would ensure 

that actual fund performance that diverges from the mandatory projections made in good faith would 

not subject funds to lawsuits).73

Moreover, we believe that skipping a step in the rulemaking process by moving straight to 

finalized Rule amendments that incorporate a risk-based glide path and diverges from the requirements 

of federal law.74 The 2010 Proposal included a regulatory impact analysis and solicited comment on 

that analysis. The Commission’s decision to move forward with dramatic changes to the 2010 proposal 

contemplated in the Release would require a re-evaluation of that initial analysis, and would warrant 

allowing the public to reconsider and comment on the new analysis. 

V. Marketing Materials Used by Non-Mutual Fund Target Date Funds 

The financial crisis of 2008 prompted a number of policymakers, including the Commission 

and DOL, to focus on target date funds and express concern about whether retirement investors 

understood these products. As testimony at the joint Commission-DOL hearing showed, mutual fund 

 

73 See supra, note 49. 

74 See, e.g., Business Roundtable v. SEC, 647 F.3d 1144, 1146 (D.C. Cir. 2011) (vacating Exchange Act Rule 14a-11—the 

“proxy access rule”— because the SEC failed adequately to consider the rule’s effect upon efficiency, competition, and 

capital formation, as required by Section 3(f) of the Exchange Act and Section 2(c) of the Investment Company Act; the 

D.C. Circuit Court noted that the SEC “inconsistently and opportunistically framed the costs and benefits of the rule; 

failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its 

predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.”); Am. Equity 

Inv. Life Ins. Co. v. SEC, 613 F.3d 166, 177 (D.C. Cir. 2010)(vacating Securities Act Rule 151A—the “fixed indexed 

annuities” rule—because the SEC’s consideration of the effect of the rule on efficiency, competition, and capital formation, 

as required by Section 2(b) of the Securities Act, was arbitrary and capricious under the Administrative Procedure Act); and 

Chamber of Commerce of the United States v. SEC, 412 F.3d 133, 136 (D.C. Cir. 2005)(finding that the SEC had violated 

the Administrative Procedure Act by failing adequately to consider the costs that mutual funds would incur in order to 

comply with the conditions of certain new fund governance rules—namely, that funds wishing to rely on certain exemptive 

rules have fund boards with at least 75% independent directors and independent chairmen—and by failing adequately to 

consider a proposed alternative to the independent chairman condition). 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 26 

complexes are not the only entities offering target date funds to retirement plans. While many nonmutual fund target date funds used in plans are organized as bank collective trusts, they also can be 

offered in other forms, including as insurance company separate accounts and customized arrangements 

put together by consultants for plans. 

The Commission’s 2010 Proposal covers only one segment of the target date fund industry—

mutual funds subject to the Commission’s jurisdiction under the Securities Act and the Investment 

Company Act. Bank collective trusts and insurance company separate accounts are exempt from 

securities law regulation if they meet the conditions of the exemptions in those laws. The result is that 

mutual funds used as investments in 401(k) plans or other defined contribution plans are subject to far 

more detailed substantive requirements and regulation of their disclosure and advertising than any 

other retirement investment providers. Plan participants who invest in mutual funds are well-served by 

this regulatory regime. 

To enhance the understanding of target date funds, non-mutual fund target date funds and 

arrangements must be subject to the same kinds of new disclosure rules as the Commission imposes on 

mutual fund target date funds. Only in this way will all retirement investors be assured of receiving the 

same basic information about these important retirement savings vehicles. Whenever these Rule 

amendments are finalized, we recommend that the DOL subject collective trust funds, insurance 

company separate accounts and other non-mutual fund arrangements to similar rules. We urge the 

Commission to continue working closely with the DOL on target date fund issues with the goal of 

coordinating the concurrent issuance of comparable target date fund advertising rules. 

■ ■ ■ ■ ■ 

We appreciate your consideration of these comments. If you have any questions, please contact 

me at (202) 218-3563, David Abbey at (202) 326-5920, or Matthew Thornton at (202) 371-5406. 

 Sincerely, 

 /s/ Dorothy Donohue 

 

Dorothy Donohue 

Acting General Counsel 

cc: The Honorable Mary Jo White, Chair 

The Honorable Luis A. Aguilar, Commissioner 

The Honorable Daniel M. Gallagher, Commissioner 

The Honorable Kara M. Stein, Commissioner 

The Honorable Michael S. Piwowar, Commissioner 
Mr. Kevin M. O’Neill 

June 9, 2014 

Page 27 

Norm Champ, Director 

Susan Nash, Associate Director 

Division of Investment Management 

Securities and Exchange Commission 

Thomas M. Selman, Executive Vice President, Regulatory Policy and Legal Compliance Officer 

Thomas A. Pappas, Vice President, Advertising Regulation 

Joseph E. Price, Senior Vice President, Advertising Regulation/Corporate Financing 

Joseph P. Savage, Vice President and Counsel, Regulatory Policy 

Financial Industry Regulatory Authority, Inc. 
A-1 

Appendix A 

Summary of Risk Ratings for Funds Used in Non-U.S. Jurisdictions 

1. UCITS IV Funds and SRRI 

Since July 2012, the European Securities and Markets Authority (“ESMA”) has required that 

all UCITS IV funds include the Synthetic Risk and Reward Indicator (“SRRI”) number in their Key 

Investor Information Documents (“KIIDs”).75 Under the applicable guidelines, UCITS IV funds are 

divided into five main categories (market funds, life cycle funds, absolute return funds, total return 

funds and structured products) for this purpose, each with a different calculation methodology. A 

UCITS IV fund calculates its rating, which ranges from 1 (lowest risk/reward) to 7 (highest 

risk/reward), and this backward-looking rating is based on fluctuations (measured weekly) in its net 

asset value over the previous 5 years. If a fund’s performance history is less than 5 years, the 

methodology for the SRRI calculation is adjusted using the returns of a representative portfolio model, 

target asset mix or benchmark of the fund from the beginning of the same period, until the date of 

availability of the actual returns of the fund. A management company must compute a fund’s SRRI in 

compliance with ESMA requirements. The SRRI must be accompanied by a narrative section, briefly 

explaining how the indicator was calculated, and what other material risks are not captured by it (e.g., 

liquidity, interest rate, currency, etc.).76

2. Australian Super Funds and Their Standard Risk Measure

The use of the Standard Risk Measure (“SRM”) was “strongly recommended” by the Australian 

Prudential Regulation Authority (“APRA”), Australian Securities and Investment Commission 

(“ASIC”), Financial Services Council (“FSC”), and Association of Superannuation Funds of Australia 

(“ASFA”) in 2011.77 Australian super funds78 are not required to provide investors with their SRM, 

 

75 Since July 2012, KIIDs, the European analog to the summary prospectus used by many U.S. mutual funds, are a 

requirement of UCITS IV. The KIID provides a concise two-page overview of a UCITS fund and is written in plain 

language and in a standardized format. It is a pre-sales document replacing the simplified prospectus and is intended to 

explain to retail investors the key features of a UCITS fund and to enable easy comparisons among funds. The KIID must 

include: (1) investment objectives and policy; (2) SRRI; (3) costs and associated charges; (4) past performance; and (5) 

practical information about the UCITS. 

76 See Committee of European Securities Regulators, CESR’s guidelines on the methodology for the calculation of the synthetic 

risk and reward indicator in the Key Investor Information Document (July 2010)(Ref. CESR/10-673), available at 

www.esma.europa.eu/system/files/10_673.pdf.

77 See Financial Services Council and Association of Superannuation Funds of Australia, Standard Risk Measure Guidance 

Paper For Trustees (July 2011), available at www.superannuation.asn.au/ArticleDocuments/116/FSCASFA_StandardRiskMeasures_July2011.pdf.aspx.

78 Superannuation is a means by which Australians accumulate funds for retirement. It is government supported and 

encouraged. Employers are required to pay a proportion of an employee’s salaries and wages into a super fund. Individuals 

are encouraged to invest additional monies into super funds to supplement their employer-sponsored retirement savings. 
A-2 

although the vast majority of super funds have adopted the SRM as a means of disclosing risks to the 

investing public.79 The SRM, if adopted by a fund, must be disclosed in the fund’s Product Disclosure 

Statement (“PDS”).80 The SRM measures risk simply as the estimated number of negative annual 

returns that could be expected over any 20-year period. This model is forward-looking (but based on 

capital market assumptions that depend on historical data), and looks forward one year to calculate the 

probability of a negative return and then extrapolates this figure for the 20-year calculation. The SRM 

predicts the likelihood, not magnitude, of negative annual returns. Establishment of the methodology 

used to calculate the SRM has been left to the individual trustees of the funds, and trustees are required

to develop their own set of capital market assumptions that take into consideration return, volatility, 

and correlations for the relevant asset classes. The investment product provider, based on internally 

generated assumptions, must calculate the fund’s SRM. SRM utilizes a 7-level classification system, 

with risk labels ranging from “Very Low” to “Very High.” In addition, the PDS must disclose that the 

SRM is not a complete assessment of risk. 

3. Canadian Risk Disclosure Requirements 

On June 18, 2010, the Canadian Securities Administrators (“CSA”) published CSA Staff 

Notice 81-319, which outlined the point of sale disclosure framework for mutual funds that includes, 

among other things, the creation and distribution of a Fund Facts.81 Fund managers are required to 

provide risk ratings for mutual funds in the Fund Facts. The required risk rating is based on a 5-level 

scale ranging from “Low” to “High.” Currently,82 the risk rating is based on the methodology adopted

 

Super funds operate as trusts with trustees responsible for operation of the fund as well as formulating an investment 

strategy. 

79 See SuperRatings, Standard Risk Measures, An Overview of Standard Risk Measures in Practice (June 2013), available at 

www.superratings.com.au/media/mediarelease/standard. 

80 The PDS is a summary of significant information about the super fund. The PDS includes or addresses: (1) general 

information about the super fund; (2) how the super fund works; (3) the benefits of investing in the super fund; (4) the risks 

of the super fund; (5) use of proceeds; (6) fees and costs; (7) tax information; (8) insurance options; and (9) how to open an 

account. This document is similar to the summary prospectus that many U.S. mutual funds use. 

81 The Fund Facts, similar to the summary prospectus that many U.S mutual funds use, is the document provided to 

investors in connection with their purchases of fund shares. The Fund Facts discloses, in plain language and in not more 

than two double-sided pages, the key information important to investors, including past performance, risks and the costs of 

investing in a mutual fund. 

82 On December 12, 2013, the CSA issued Notice 81-324 and Request for Comment—Proposed CSA Mutual Fund Risk 

Classification Methodology for Use in Fund Facts (“CSA Notice 81-324”). The proposed risk classification methodology 

outlined in this Notice would replace the current requirement that fund managers determine the fund’s risk rating based on 

a methodology of their choosing. The proposal, conceptually similar to the SRRI in Europe, would require fund managers to 

use a standardized methodology based on standard deviation to measure the fund’s volatility by looking backwards at the 

fund’s performance history on a monthly basis over a 10-year period. The proposed methodology contemplates moving from 

the current 5-category scale to 6 risk categories that range from “Low” to “Very High.” Assignment of a rating would 

depend on the fixed “standard deviation band” into which a fund falls. The comment period for this proposal closed on 

March 12, 2014, and to date, the CSA has not adopted final amendments. 
A-3 

by the fund manager in its discretion. The majority of managers use volatility of past returns in 

determining their funds’ risk ratings.83 

 

83 See CSA Notice 81-324. 
B-1 

Appendix B 

Target Date Fund Glide Paths and Returns 

 As noted in the body of our comment letter, the SEC’s Investor Advisory Committee (the 

“Committee”) argues that a glide path illustration based solely on asset allocation is unlikely to reliably 

capture potentially significant differences in fund risk levels, especially “where the asset classes are 

defined quite broadly, as they are in the Commission proposal.” The Committee notes that in 2008 

returns ranged widely for funds nearing their target dates, notably 2010 target date funds.84 

 Evidence indicates that a broad asset allocation glide path (i.e., one showing a fund’s 

investments in stocks and bonds only) would have been quite informative in 2008 for investors in funds 

near their target dates. Figure A.1 presents results of a statistical analysis that seeks to explain the 

returns of individual target date funds based on what investors knew from data that were publicly 

available the prior year about the percentages of these funds’ assets that were held in stocks and in 

bonds.85 

 For example, the upper-left panel shows for 2010 target date funds the returns that investors 

could have expected in 2008 based on those funds’ 2007 broad asset allocations and had investors 

known the returns to be gained in the stock and bond markets in 2008.86 The red line in each figure is 

the “line of perfect fit.” In other words, if the broad asset allocation in 2007 is a good indicator of a

fund’s return in 2008, the blue dotted point (representing the expected return for that fund) will lie 

exactly on top of the red line. The blue dots are widely dispersed, ranging from roughly -4 percent to 

-42 percent for 2010 target date funds, which indicates, as the Committee noted, that the returns on 

individual 2010 target date funds varied widely in 2008. Also, however, the blue dots are scattered in a 

fairly narrow band around the red line, which indicates that knowledge of a fund’s broad asset 

allocation would have allowed investors in 2007 to gauge rather accurately the 2008 returns of these 

funds, had they known in 2007 how stock and bond markets would behave the following year. 

Statistically speaking, the analysis explains most (72 percent) of the wide variation in the 2008 returns 

of these funds (as measured by the statistical concept of “R-squared”). 

 

84 The Recommendation of the Investment Advisory Committee on Target Date Mutual Funds states that “among [target date] funds 

with a 2010 target date, losses in 2008 ranged from 9 percent to 41 percent ... Much of those differences in risk can be explained by 

differences in the asset allocation models and glide paths used by different funds ... But choices of assets within the various assets classes, 

inclusion of assets from outside the traditional asset classes, and other risk management practices can also have a significant impact on 

fund risk levels. A glide-path illustration based solely on asset allocation is therefore unlikely to reliably capture potentially significant 

differences in fund risk levels.”

85 The statistical analysis is a “regression” of a fund’s return on the portions of its assets in stocks and bonds the previous year. The 

estimated regression is used to explain fund returns that would have been expected for the various target date funds based on their broad 

asset allocations in the previous year. 

86 In effect, the regression coefficients are proxies for the overall returns in the stock and bond markets. 
B-2 

 The upper-right panel shows that similar results hold for the 2008 returns of 2020 target date 

funds. Although information about each fund’s broad asset allocation is not quite as informative as for 

2010 target date funds, the broad asset allocation is still quite informative. Returns of 2020 target date 

funds were not as dispersed as were those of 2010 target date funds, but variation in returns was 

substantial, ranging from about -20 percent to almost -45 percent. Again, however, the blue dots are 

generally scattered closely around the red line, indicating that a fund’s broad asset allocation as of 2007 

would have been quite informative about the fund’s returns the subsequent year, had investors known 

how stock and bond markets would fare the following year. 

 These findings hold for later years, as well. For example, the lower-left and lower-right panels in 

Figure A.1 present the same kind of analysis for the 2012 returns of funds with 2010 and 2020 target 

dates, respectively. Returns for these funds are considerably less dispersed than in 2008. As before, the 

blue dots remain tightly clustered around the red line, indicating that knowledge of a fund’s broad asset 

allocation would have allowed investors in 2011 to gauge rather accurately the 2012 returns of these 

funds, had they known in 2011 how stock and bond markets would behave the following year. 

 From this analysis, two conclusions can be drawn. First, the figure highlights that to the extent 

investors in 2010 target date funds were surprised in 2008 by the performance of their funds, it most 

likely reflects an unawareness that funds near to their target retirement dates may still hold a significant 

portion of their assets in stocks or other securities that are more volatile than, say, U.S. government 

bonds. Differences in asset allocations among funds sharing the same target retirement date largely 

reflect the different views fund sponsors may have about how best to structure target date funds in 

order to meet investors’ financial goals. This, in turn, suggests the appropriateness and value of 

highlighting for investors differences in broad asset allocations of target date funds through a 

presentation in marketing materials of an asset allocation glide path. 

 Second, the analysis highlights that any measure intended to highlight to investors the range of 

returns they might experience will be heavily dependent on actual market outcomes. In years when the 

stock market declines, those who have invested in target date funds with heavier allocations to stocks 

may experience unfavorable returns on their target date funds. Alternatively, in years when the bond 

market declines but the stock market advances, such as in 2013, investors in these same funds would 

experience favorable returns on their target dates funds. Thus, the perceptions that investors form of 

their target date funds will depend in large part on specific stock and bond market outcomes. This 

illustrates a difficulty that could arise from a risk-based glide path: presumably, a fund with a heavy

allocation to fixed income securities would be seen as “less risky,” but in a year such as 2013 such a fund 

might nevertheless surprise its investors because of muted or even negative returns. 

 

 
B-3