Senate eyes fiduciary tag for all QDIA managers

The Senate Special Committee on Aging is considering proposing legislation that would require all managers of qualified default investment alternatives in defined-contribution plans to act as fiduciaries under ERISA — a move that would place much more stringent requirements on all managers of target date funds, target risk funds and balanced funds.

Sen. Herb Kohl, D-Wis., chairman of the committee, said last month that he is planning to propose legislation to mandate that managers of target date funds — which are one type of QDIA — take on fiduciary responsibility under the Employee Retirement Income Security Act of 1974.

But now he is mulling an expansion of the bill to include all QDIAs, according to an aide, who asked not to be identified.

Such legislation would mean that all QDIA managers, including those overseeing target date, balanced and target risk funds, and managed accounts, would be held to a heightened fiduciary duty — and thus would have to take into account the needs of the plan participants when managing their funds. Currently, the only QDIA managers that are required to act as fiduciaries under ERISA are those who oversee managed accounts.

The committee is looking into the issue and weighing the pros and cons of such a proposal, the aide said. It hopes to introduce some form of legislation on the issue by the end of next month.

The committee’s move comes as many industry observers are wondering why Mr. Kohl initially planned to limit such a mandate to target date managers alone. With target date funds grabbing the lion’s share of retirement assets — 69% of em-ployers automatically enroll their employees in these funds through their 401(k) plans — and increased scrutiny by Congress after heavy losses in stock-heavy funds used by investors approaching retirement, many observers think increased regulation should extend to all QDIAs.

“Why are we singling out target date funds?” said Greg Ash, head of the ERISA group at Spencer Fane Britt & Browne LLP. “Participants don’t make the elections, so there ought to be a higher fiduciary standard to protect those who aren’t actively protecting themselves.”

Because many 401(k) participants placed in a QDIA by default do not monitor their investments closely, it is essential that these managers have additional fiduciary responsibility, said Matthew Hutcheson, an independent fiduciary. For example, 40% of workers placed in a QDIA didn’t change the rate of savings or the fund they were in over the next 26 months, according to Hewitt Associates.

“Many QDIA managers view themselves as manufacturers of a financial product, so they don’t view themselves as owing any duty of loyalty,” Mr. Hutcheson said. “They basically say that whoever is selling or installing the product is the one who should make sure it’s in the best interest of the participant.”

For their part, fund companies argue that they are already considered fiduciaries under the Investment Advisers Act of 1940.

“I’m not sure another layer of regulation really does anything,” says Jamie Kalamarides, senior vice president of retirement solutions at Prudential Financial Inc. “It doesn’t solve the issue of longevity risk that many participants face.”

Despite an ERISA mandate, it is impossible for fund companies to manage their funds to take into account the specific needs of investors in a particular plan, who may be demographically diverse, said Pam Hess, director of retirement research at Hewitt Associates.

“It’s never going to meet everyone’s needs perfectly,” Ms. Hess said. “Different plans have different needs.”

One compromise could be legislation that would require a more general fiduciary role that would address some of Congress’ concerns regarding funds’ self-dealing and conflicts of interest, said Valerie Kupferschmidt, general counsel at Hewitt.

“There could be a limited fiduciary role assigned to QDIA managers,” she said.

Such an effort, however, would be met by fierce protest from the mutual fund industry.

“You don’t need new fiduciary duties for the people who provide qualified default investment options to 401(k) plans,” said Mary Podesta, senior counsel for pension regulation at the Investment Company Institute. “There is a structure in place that is very protective of plan participants.”

Despite the fund industry’s opposition to the idea, observers agree that discussions around fiduciary responsibilities within 401(k) plans are only going to increase in the coming months as Congress, the Securities and Exchange Commission and the Department of Labor all wrestle with these issues.

“I think [Mr. Kohl] has the wind on his back in that the Department of Labor and SEC are examining the appropriateness of QDIA protections and there is a general distaste for some of the status quo in the fund management industry,” said Jason C. Roberts, a partner at Reish & Reicher..

E-mail Jessica Toonkel Marquez at [email protected].