The broker-dealer subsidiaries of a number of large mutual funds firms received letters from Massachusetts Secretary of the Commonwealth William Galvin seeking information related to their target-date fund offerings.
“Financial institutions can’t be permitted to protect one class of investors at the expense of another”
Vanguard Marketing Corporation, Fidelity Brokerage Services, T. Rowe Price Investment Services, American Fund Distributors, and Blackrock Investments were asked by the Bay State’s Securities Division about potential tax disclosure issues with TDFs, which Galvin claim disproportionately impact retail investors and result in some receiving hefty tax bills they do not expect.
“Target-date mutual funds are often attractive to investors as a hands-off investment option,” Galvin said. “Nevertheless, target-date mutual funds, like all investments, can lose money and can be risky. Managerial decisions by fund advisors can also negatively impact retail investors.”
Galvin added he’s particularly concerned by reports of inadequately disclosed fund changes that shifted financial burdens to small-dollar investors, resulting in large tax bills for those who held the funds in non-retirement accounts.
“Financial institutions can’t be permitted to protect one class of investors at the expense of another,” he continued. “Investors need to be made aware of the risks involved and the tax liabilities they could face in certain circumstances, and I want to make sure institutions are being upfront about these risks.”
Morningstar found total assets in target-date strategies stood at approximately $2.8 trillion at the end of 2020, an increase of 20% over the previous year. Yet flows into target-date funds and collective investment trusts (CITs) dropped to $52.3 billion in 2020, a 59% decline from 2019.
Fees continued to play an important role in shaping the target-date strategy competitive landscape. Against the backdrop of a decline in contributions in 2020, the bulk of net inflows went to the industry’s cheapest share classes.
The average asset-weighted fee for target-date funds, which depicts the actual cost investors are paying, fell to 0.52% from 0.58% in 2019, and 0.73% five years ago.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.