Labor Department takes first step in regulation of target date funds

May 7, 2010 @ 3:49 pm

By Mark Schoeff Jr.

Recently released federal guidance regarding target date funds was just the first step in a process that eventually will include regulations for the investments, a Labor Department official said Friday.

The investor bulletin — posted online Thursday — noted, among other things, that the investment styles and strategies of target date funds can be very different. It also stated that some target date funds may not reach their most conservative allocations until 20 to 30 years after the target date, while others may become their most conservative at either the target date or immediately after.

Indeed, some observers were surprised that the bulletin was limited to discussing how the funds work.

“We're still looking at this,” Phyllis Borzi, assistant secretary of labor for the Employee Benefits Security Administration, said after speaking at the Investment Company Institute General Membership Meeting in Washington. “This is still a big project.”

Separately, the DOL expects to provide a compliance checklist — aimed at plan sponsors — for choosing target date funds. The agency this August also plans to publish a proposed regulatory amendment to enhance target date disclosure in plans. The last step will be to amend qualified-default-investment-alternatives regulations around target date funds.

“In that context, what we're probably going to be doing is adding more disclosure,” Ms. Borzi said.

One problem, according to Ms. Borzi, is that people don't understand what's in their target date funds. Helping them get their arms around the investments and become better consumers is the goal of the rulemaking.

“What we're trying to do in virtually every one of our regulatory agendas is to try to figure out a way to provide more choices to people and give people the information they need to make choices — not the paternalistic, ‘This is what you should do, and everyone needs to do X, Y, Z,” Ms. Borzi said. “That's the theme that flows through the entire regulatory agenda.”

The process is taking a while because Ms. Borzi wants the guidance to be digestible. For instance, SEC bulletins sometimes can be incomprehensible to the Labor Department. “I have a strong commitment to simple, plain language,” said Ms. Borzi, a former high school English teacher. “We kept rewording it, trying to make it easier for people to understand, for ordinary participants to understand.”

The push to demystify target date funds is a positive one — but one that's long overdue, said Marcia S. Wagner, managing director at The Wagner Law Group. “They have to let people know that that there are potential misnomers,” she said. “Participants need to understand what a glide path is and that suitability shouldn't be determined based on the name of the fund.”

The next step in the process — reassessing what ‘fiduciary' means in federal retirement law — is long overdue, according to Ms. Borzi. Since Congress approved the Employee Retirement Income Security Act in 1974, the investment market has changed dramatically.

“It's the linchpin of our enforcement activity,” Ms. Borzi said of the term ‘fiduciary.' “We need to go back and look at some of the fundamental sets of regulations that the department issued just after the passage of ERISA to see if they need to be freshened up, updated.”

She added: “When regulations were issued in 1977, 401(k) wasn't even a gleam in the eye of Congress.”

Meanwhile, lawmakers continue to grapple with fiduciary standards. Several amendments have been introduced to the financial-reform legislation currently being debated in Congress which would extend the fiduciary standard of care to broker-dealers.

Ralph Derbyshire, a senior vice president at Fidelity Investments, said that given those proposals, broker-dealers could wind up as fiduciaries in securities law but not fiduciaries when it comes to ERISA.

“Let's harmonize the whole investment world,” Mr. Derbyshire suggested.

Darla Mercado contributed to this report.

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