Comments to the Employee Benefits Security Administration (EBSA) regarding 

the proposed adjustments on disclosures for target date funds (originally 

proposed in 2010, SEC, 17 CFR Parts 230 and 270)

PEI is a privately-owned consulting firm focused on providing institutional investment and retirement 

plan consulting services. Founded in 1992, PEI operates in an independent, non-affiliated capacity to 

provide advice, guidance, direction, and education to the fiduciaries of institutional investment 

programs. Our independence allows us to serve our clients in a manner that is free from influence from 

investment management firms, mutual fund companies, broker-dealers, insurance companies and 

others in the industry. PEI currently maintains more than 200 institutional relationships representing 

over $40 billion in assets under advisement. More than 65% of our book of business is in defined 

contribution plan assets.

PEI’s Research Group, which is comprised of 12 research analysts, conducts comprehensive due 

diligence on the target date fund (TDF) industry and managers. We maintain a proprietary database of 

TDF providers, comprised of over thirty TDF providers, on which we conduct through and frequent due 

diligence. Annually, PEI distributes a very detailed Request for Information (RFI) to these providers. The 

RFIs allow us to evaluate many facets of each provider’s philosophy guiding glide path construction, 

their objectives, how they manage the trade-offs between longevity risk and shortfall (volatility) risk, 

asset class diversification, underlying fund selection, etc. Additionally, PEI meets with each of these 

providers regularly to discuss performance attribution, the composition of the management team, 

changes to underlying assumptions used in glide path construction, capacity issues in the underlying 

funds and any changes to the glide path or its underlying asset classes or funds. 

Portfolio Evaluations, Inc. (PEI) has the following comments for the Employee Benefits Security 

Administration relating to proposed regulatory amendments on disclosures for target date funds (TDFs) 

that were originally proposed in 2010 (SEC, 17 CFR Parts 230 and 270):

1. The 2010 proposal contained a requirement for TDFs to provide an illustration of the asset 

allocation along the glide path on all TDF marketing materials. In 2013, the SEC’s Investor 

Advisory Committee recommended that the Commission develop a glide path illustration for 

TDFs based on a standard measure of fund risk as a replacement or a supplement to the asset

allocation/glide path illustration.

• PEI does not believe that any single standard measure of risk would be understandable 

or meaningful to most participants. First, any single measure of risk (such as standard 

deviation, for example) does not capture all the risks associated with any given asset 

class. For example, high yield bonds over the past five years may not appear to be a 

very risky asset class if one were to look at standard deviation alone. However, the 
standard deviation of high yield bonds does not reflect the fact that the asset class’s

returns in declining markets are highly correlated to equity returns. In other words, high 

yield bonds do not provide the diversification benefits commonly associated with fixed 

income investments. Secondly, PEI believes that simplicity is paramount in messaging to 

TDF investors. Participant inertia is a well-researched phenomenon. If messaging 

regarding investments is complicated, investors will ignore the message all-together. 

Standard measures of risk, such as standard deviation, would not be understood by 

most participants and, as such, would not be meaningful or impactful in illustrating the 

risks in any given TDF.

• PEI believes that an illustration of a TDF’s exposure to more volatile asset classes would 

be more impactful to the overwhelming majority of TDF investors than would be an 

actual measure of risk. PEI suggests TDF providers be required to show their allocation 

to “risk-seeking assets.” Accompanying the illustration, there should be a notation that 

risk-seeking assets are those that have exhibited higher levels of historic volatility and 

include the following asset classes: US equities (small, mid and large cap), non-US 

equities, high yield (below investment grade) fixed income, real estate and 

commodities. Expressing the glide path allocations in terms of allocation to risk-seeking 

assets provides a more comprehensive and accurate view to the risk of a given TDF at 

any point along the glide path. Participants would easily be able to see what their 

exposure to riskier asset classes would be at retirement, which is something many 

participants may not realize today.

• Recognizing the importance of providing a balance between simplicity and meaningful 

disclosure about risk in TDFs, PEI recommends that the asset allocation/glide path 

depiction of exposure to risky assets be juxtaposed to that of a traditional balanced fund 

allocation of 60% equities/60% bonds. The inclusion of a traditional balanced fund 

(which was a widely used as a QDIA before the recent TDF surge) would highlight the 

level of volatility risk in a given TDF in a more meaningful way for participants, without 

unnecessarily complicating the message. PEI also suggests that a representation of a 

static 100% equity and 100% money market fund also be shown on the illustration, thus 

providing additional relevant points of comparison for investors.

• PEI suggests that the exposure to risk assets illustration include a graphic reflection of 

the TDF’s exposure to more volatile asset classes, accompanied by a simple table.

• PEI suggests that the information on the graph and in the table be expressed in terms of 

“years to retirement” so that investors can see their expected the exposure to riskier 

asset classes change in the years preceding retirement, at retirement, and in the years 

after retirement, should they leave their assets in the TDF after retirement.

• TDFs should provide actual asset allocation information, regardless if the underlying 

funds are sub-advised. Allocations to types of funds in lieu of actual asset allocation 

should not be acceptable.
Please see suggested illustration below:

2. There are many providers who make shifts to their strategic (expected) allocations along the 

glide path to take advantage of (or protect against) expected market movements in various 

asset classes over a shorter time period (6 months to 18 months, typically). Commonly called 

tactical allocations, these short term shifts in allocations are typically made within a 2-10% band 

around the strategic weights for the asset classes. For TDFs whose managements employ (or 

can employ) a tactical asset allocation overlay, PEI suggests that the potential for tactical 

changes to the glide path should be disclosed alongside the asset allocation/glide path 

illustration. Normal (or allowable) ranges for the tactical under/overweights to asset classes 

should also be included.