Mr. Kohl, chairman of the Senate Special Committee on Aging, is upset because an investigation by his committee has revealed that 2010 target-date funds — designed for people who will retire in 2010 — offered by various mutual fund companies had wildly different asset allocations between equities and fixed income last year, with many of the funds investing more than half their assets in stocks.
One 2010 target-date fund lost more than 40% of its assets in 2008, Mr. Kohl wrote in a Feb. 24 letter to Hilda Solis, secretary of labor: “A loss of this magnitude simply should not occur in a financial product that was designed and is specifically advertised to limit risk and volatility as one nears retirement.”
What Mr. Kohl wants the SEC and DOL to do, according to Ashley Glacel, his spokeswoman, is to establish rules and regulations setting standards for asset allocations within target-date funds.
“At this point, you can call anything a target-date fund, but it might not be doing what a target-date fund says it will do,” Ms. Glacel said. “If you're going to call it a 2010 target-date fund, it better be pretty darn conservative as you get closer to 2010.”
One possible solution, being promoted by Mercer Bullard, founder and president of the advocacy group Fund Democracy Inc. in Oxford, Miss., and Barbara Roper, director of investor protection for the Consumer Federation of America, Washington, would be for the SEC to regulate misleading fund names to ensure that asset allocations were appropriate.
“The idea is that they (target-date funds) should be within a reasonable range of asset allocation given the target date,” Ms. Roper said.
Representatives of major employer groups oppose additional regulation of target-date funds, partly on the grounds that the asset allocations of the funds — and the glide paths describing how the fund's investments will move toward more conservative fixed-income investments over time — are already disclosed to plan participants in mutual fund prospectuses.
Some argue the equity allocation of target-date funds has only become an issue because the stock market tanked last year.
“To make these rash judgments based on a real aberration in the market doesn't make any sense at all,” said Ed Ferrigno, vice president of Washington affairs, Profit Sharing/401(k) Council of America, Chicago. “In an extreme bull market, the same people would be arguing that the target dates weren't aggressive enough.”
Employer group lobbyists also argue that adopting Mr. Kohl's recommendations could undermine a key principle in the Employee Retirement Income Security Act charging plan sponsors with the fiduciary obligation to pick plan investments appropriate for their plan participants.
“Each company has different demographics, and they will choose a fund for what works for their demographics,” said Mark Ugoretz, president of the ERISA Industry Committee, Washington. “The idea that you can have a cookie-cutter target-date fund makes no sense, and we would be opposed to that.”
“There are not any easy answers here,” added Judy Schub, managing director of the Committee on Investment of Employee Benefit Assets, Bethesda, Md. “What might be an appropriate amount of risk for one work force might not be appropriate for another, and those are issues the fiduciary and plan sponsor have to look at.”