Officials at the Department of Labor's Employee Benefits Security Administration are reviewing whether there should be more disclosure of target-date funds used by defined contribution plans as qualified default options, Phyllis Borzi, assistant labor secretary, testified last week before the Senate's Special Committee on Aging.
“It seems clear that people want us to take another look,” she said in an interview following the hearing. “Whether we make any changes is another question.”
She also said it was unclear when the agency would complete its review.
In a report on target-date funds released by the committee last week, Chairman Herb Kohl, D-Wis., said he had asked the Government Accountability Office to review its qualified default investment alternatives. Among the questions Mr. Kohl wants the GAO to answer, the report said, is “what changes, including QDIA declassification, could be made to better ensure that these vehicles help to provide a more sound retirement savings strategy.”
Under QDIA rules, adopted by the Bush administration in 2007, sponsors of defined contribution plans get some protection from fiduciary lawsuits when they default employees into one of three kinds of investment options blessed by the Labor Department: target-date funds; balanced funds; and managed accounts.
QDIA rules governing the use of target-date funds say they must be invested in a mixture of equity and fixed income, and change their asset allocations over time “with the objective of becoming more conservative” as the participant nears retirement.
The committee report also said some mutual fund managers might be including “low-performing funds” in their target-date retirement offerings, serving the managers' best interests at the expense of investors.
“While well-constructed target-date funds have great potential for improving retirement income security, it is currently unclear whether investment firms are prudently designing these funds in the best interest of the plan sponsors and their participants,” Mr. Kohl wrote in the report.
Executives at many larger DC plans, however, use custom target-date funds that give them more control over the investments than they have in generic versions.
The report, “Target Date Retirement Funds: Lack of Clarity Among Structures and Fees Raises Concerns,” was prepared by the staff of the committee's Democratic members. The report also noted that mutual funds that offer target-date funds are not subject to the fiduciary standards of the 1974 Employee Retirement Income Security Act, while retirement plans are.
“However, plan sponsors generally do not have a choice in selecting the underlying funds, and instead must choose from a portfolio of proprietary funds typically constructed by the (mutual fund) firm,” the report said. “As a result, some investment firms may include low-performing funds in their portfolio in an effort to garner more assets,” the report continued.
The report also said shortcomings in target-date fund design and transparency “have led plan sponsors and participants to misunderstand these products, and in some cases suffer large losses.”
“It is vital that action be taken to ensure that the fees associated with certain target-date funds are disclosed, as well as steps to clarify the fiduciary responsibility of not only plan sponsors, but also those companies that construct these funds,” the report said.