The Labor Department this week moved closer to providing guidance to retirement plan sponsors on how to select target date funds by adding the issue to its spring regulatory agenda.
The DOL yesterday said the Employee Benefits Security Administration is planning to publish a compliance checklist for target date fund selection, which will help plan sponsors evaluate and choose these funds for their defined-contribution plans.
Target date funds are designed to decrease their equity allocations gradually over time to limit risk as a plan participant nears retirement. However, the funds came under fire after the 2008 downturn, when it was discovered that many funds nearing their target dates still had large exposure to stocks, leading to huge losses for participants.
The checklist may pose questions on the key characteristics of target date funds, such as whether the fiduciary understands the glidepath, or grasps the difference between “to retirement”— when a fund maintains a conservative allocation with the expectation that assets will be managed only until the retirement date — versus “through retirement”— when assets are managed as far as 25 years past the retirement date and maintain a higher allocation of equities, according to said Bradford P. Campbell, an attorney at Schiff Hardin LLP, and a former assistant secretary of labor at the DoL.
“This will be helpful guidance,” said Mr. Campbell. “Fiduciaries in smaller plans probably didn't fully appreciate how the products were originally structured, and it's helpful that the DOL will highlight this and give them something concrete that they can point to.”
“The best way to solve the concerns we've heard expressed isn't to change the nature of the product and offering, but to ensure that people understand what they're getting,” he added. “To me, this is a question of fiduciary education.”
The EBSA hasn't decided on an exact date for the release of the checklist, simply aiming for this spring, noted Gloria Della, spokeswoman for the DOL.
The EBSA this August is also planning to publish a proposed amendment to regulations on qualified default investment alternatives which will provide fiduciaries greater detail on what investment information needs to be disclosed to participants and beneficiaries. The rule change will also enhance the information that needs to be disclosed on target date funds and other age-based QDIAs.
That proposed rule change was published in yesterday's Federal Register.
ERISA experts welcome the change. “This guidance will be welcomed by the 401(k) plan community, since target date funds are a unique investment product and many plan sponsors do not have the tools to evaluate them,” said Marcia S. Wagner, managing director at The Wagner Law Group.
Increased disclosure on target date funds could mean that plan fiduciaries will have to be better-able to articulate the difference between funds that are managed to and those that are managed through retirement.
Not all funds that are slugged with a certain year are created equally; some might be more conservative or risky than others. As a result, the proposed rule may mean that plan fiduciaries would have to determine whether a fund with a given year were appropriate for the segment of participants who would be defaulted into it, explained Jason C. Roberts, a partner at Reish & Reicher, a law firm that specializes in the Employee Retirement Income Security Act of 1974.
“A plan fiduciary may be required to demonstrate that it prudently selected a 2015 fund, based upon the needs of a typical participant in that plan who expects to retire at 2015,” he said.
Also, since the difference between a “to” and “through” retirement strategy becomes increasingly apparent in target date funds that are approaching maturity, plans may look to offer multiple options to their participants, Mr. Roberts added. On the provider side, record keepers are already feeling the pressure from plan sponsors to add default options, he added.