WASHINGTON, D.C. – Today U.S. Senator Herb Kohl (D-WI), chairman of the Senate Special Committee on Aging, applauded the U.S. Department of Labor (DOL) for announcing its intent to make additional information available to employers charged with evaluating and selecting target date retirement funds on behalf of their employees. Target date funds, sometimes called lifecycle funds, are a type of mutual fund that is supposed to automatically rebalance to a more conservative asset allocation as the participant approaches their target retirement date. The huge losses suffered in 2008 during the economic downturn by target date fund participants on the brink of retirement instigated an Aging Committee investigation into the design and transparency of these funds. 

 

“Given that so many Americans are defaulted into target date funds, I am heartened that both DOL and the SEC are continuing to make oversight of these funds a priority. These new regulations are a great first step in helping employers make vital decisions about how their employee’s 401(k) savings should be invested,” said Kohl. “However, more clarity and heightened protections for target date investors are needed, and I will continue to work to address these issues.”

 

Since DOL designated target date funds as a Qualified Default Investment Alternative (QDIA) in 401(k) plans, they have experienced an explosive growth in popularity. Target date funds only made up roughly 3 percent of defined contribution savings in 2006, but are expected to increase to 20 percent in 2010. By 2015, it is expected that more than one-third of all defined contribution savings will be in target date funds. 

 

As part of its Spring 2010 Regulatory Agenda, DOL announced today that the Employee Benefits Security Administration (EBSA) would join with the U.S. Securities and Exchange Commission (SEC) to publish a checklist that employers can use in selecting target date fund options that best fit the retirement needs of their employees. EBSA will also make more information available to fund participants about the risks and benefits of investing in target date funds. The Aging Committee has previously raised concerns about similarly-named funds operating in dramatically different ways. Further, employers are often unaware of the investments which compose each target date fund, as they are determined by a fund manager.

 

Kohl recently announced that he is crafting legislation to require target date fund managers to take on a fiduciary responsibility in order for such funds to be eligible for the designation of QDIA. As with traditional 401(k) products, Kohl is also concerned with the fees associated with target date funds. According to a report released last month by Towers Watson, fee-related erosion in target date funds has resulted in a “very material” loss of retirement assets for participants.

 

In February 2009, the Aging Committee issued a report on the excessive stock risk found in many 2010 funds. At an October hearing on strengthening the 401(k) system, the Aging Committee heard testimony concerning the difficulty of determining the underlying composition of target date funds and issued another report highlighting concerns about fees and the lack of clarity among target date funds. Witnesses demonstrated that these funds are often created with inherit conflicts of interest, and can be composed entirely of proprietary products.