The chairpersons of two of the leading retirement plan oversight committees in Congress are calling for a review of target-date funds.
Sen. Patty Murray, D-Wash., chairwoman of the Senate Committee on Health, Education, Labor and Pensions, and Rep. Robert Scott, D-Va., chairman of the House Committee on Education and Labor, recently wrote to the head of the Government Accountability Office (GAO), asking that the agency review the use of target-date funds (TDFs) in 401(k) and similar defined contribution retirement plans.
“The employer-provided retirement system must effectively serve its participants and retirees, and we are concerned certain aspects of TDFs may be placing them at risk,” the committee chairs’
May 6 letter to Gene Dodaro, Comptroller General of the U.S., stated. “TDFs are often billed as ‘set it and forget it’ investments, yet expenses and risk allocations vary considerably among funds. The millions of families who trust their financial futures to target-date funds need to know these programs are working as advertised and providing the retirement security promised.”
The letter expressed concern over actions by the Department of Labor under the prior administration that, Murray and Scott wrote, “paved the way for the use of potentially higher risk and more lightly regulated ‘alternative’ assets, such as private equity.” The letter added, “Little is known about the extent to which TDFs offered in employer-provided retirement plans include alternative assets and how those TDFs with alternative assets impact participants’ fees and returns.”
[Related SHRM article: DOL Gives OK to Private Equity in Diversified 401(k) Funds]
The committee chairs asked the GAO to answer questions including:
- What steps have TDF providers taken to mitigate the volatility of TDF assets?
- How does the asset allocation and fee structure vary across those TDFs used as default options in 401(k) plans, and how do those compare with other investment products?
- How are TDFs marketed and advertised, and are participants “sufficiently aware of the cost and asset allocation variation among TDFs?”
- What are possible legislative or regulatory options that would bolster the protection of plan participants nearing retirement or who are retired and also achieve the intended goals of TDFs?
Plan Sponsors’ Fiduciary Responsibility
According to Carol Buckmann, a partner with law firm Cohen & Buckmann P.C. in New York City, “Many fiduciaries responsible for selecting their 401(k) plan’s target-date
funds don’t understand how these funds work. … Lawsuits challenging target-date fund selection are on the rise, and plan fiduciaries need to be able to defend their choices in response to these suits.”
Buckmann wrote that while many fiduciaries think that TDFs are a safe solution for participants who don’t make their own investment choices, “all investment options have varying degrees of risk.”
To protect themselves, she advised employers whose plans have TDFs to take steps such as:
- Make sure that the plan’s investment policy statement includes provisions on selecting and monitoring TDFs.
- Compare the proprietary TDFs offered by the financial firm providing administrative services to the plan with other available alternatives.
- Understand the different fees and compare fund family fees, bearing in mind that TDFs have multiple layers of fees.
Barron’s reported that target-date funds “did well in 2020.” The average return of a 2020 target-date fund—with a mix of stock and bond holdings adjusted to reduce risk for those with a 2020 retirement date—was a gain of 10.8 percent.
The S&P 500 index of large stocks, with greater downside risk from stock market volatility, finished 2020 with a gain of 16.26 percent.