Although target-date funds are not mentioned in the Department of Labor's new fiduciary advice regulations, 401(k) fiduciaries should not blindly assume this rule has no effect on how they go about selecting, monitoring and helping participants use the most popular qualified default investment alternative. After all, TDF families are nothing more than manifestations of various asset allocation models for creating and maintaining “appropriately” diversified portfolios that will provide average 401(k) participants with adequate retirement incomes.
The new regulations mandate that TDF vendors provide fiduciaries and participants with “(a)ll material facts and assumptions on which” their asset allocation model is based, including rates of return. If “interactive investment materials,” including calculators, that can be used to “(e)stimate future retirement income needs and assess the impact of different asset allocations on retirement income … or estimate a retirement income stream” are also made available, the regulations also require that the TDF manager (and/or record keeper) must again supply the underlying assumptions (Federal Register, Vol. 81, No. 68, April 8, 2016, Rules and Regulations, p. 20,998).
These new regulations should be welcomed by participants, fiduciaries and plan sponsors since TDF managers rarely if ever disclose the compound-annual expected rates of returns embedded in their glidepaths during a participant's active accumulation phase and decumulation phase in retirement, assuming a participant keeps assets in the employer-sponsored plan. TDF managers usually don't provide such transparency even though these expected rates of return are needed by:
• financially unsophisticated participants to calculate their appropriate contribution rates and get a realistic picture of what retirement security really costs;
• fiduciaries in prudently selecting, monitoring, communicating (as in gap analyses) and then evaluating whether their TDFs are actually helping participants achieve a lifelong, financially secure retirement; and
• plan sponsors wanting to assess the likelihood of their health-care costs spiraling upward because significant numbers of workers won't be able to afford retiring.
So why haven't TDF managers disclosed their funds' expected rates of return? To answer this question requires understanding how TDF managers arrive at their glidepaths — the representation of how the “appropriately” diversified portfolios change as participants age.