DOL, SEC seen issuing alert on target date funds

The Labor Department and the Securities and Exchange Commission are working on a joint consumer alert related to the use of target date funds in retirement plans, according to a person familiar with the situation.

Separately, the Labor Department is planning to issue its own target date fund guidance for retirement plan fiduciaries. For the long term, the agency is still discussing how to regulate the disclosures target date fund managers are required to provide to retirement plan participants, the source said.

The Labor/SEC investor alert will center on what consumers need to know about target date funds, which are marketed as a way to make an investment portfolio gradually more conservative as the investor’s retirement date approaches, said the source, who asked not to be identified.

Meanwhile, the Labor Department’s guidance for plan fiduciaries will focus on the issues they should consider before adding target date funds to their plans, the person said.

Long term, the Labor Department is said to be discussing amendments to its regulations governing qualified default investment alternatives and how much needs to be disclosed to plan participants.

The investor alert and separate Labor Department guidance are expected to be issued by the end of April. As of now, no timeline has been established for the proposed regulations, the source said.

Gloria Della, a Labor Department spokeswoman, declined to comment. John Heine, a spokesman for the SEC, also declined to -comment.

Critics of target date funds have been concerned that the Labor Department might look to pass the buck and let Congress fashion new regulations.

Nevertheless, Assistant Labor Secretary Phyllis Borzi said in December that the department was planning to issue guidance by the end of the year on how plan sponsors should use target date funds.

But later that month, the Labor Department indicated that it didn’t view target date funds as “plan assets,” and thus advisers of these funds shouldn’t be considered fiduciaries under the Employee Retirement Income Security Act of 1974. “That was the first sign that they might be punting this issue to Congress,” said Marcia Wagner, founder and principal of The Wagner Law Group.

On Feb. 26, in a conference call announcing the proposed 401(k) advice regulations, Ms. Borzi said the proposal would address potential conflict-of-interest issues that could arise if advisers of a plan promote their own products. That comment prompted increased concerns among target date fund critics that the agency might defer to Congress on the matter.

Legislation is expected to come out of the Senate Special Committee on Aging soon that would require target date fund managers — and perhaps all managers of qualified default investment alternatives in defined-contribution plans — to act as fiduciaries under ERISA.

But even if the Labor Department sticks to its timeline on guidance, it will be summer before it issues proposed regulations on QDIAs, said Bradford P. Campbell, an attorney at Schiff Hardin LLP, who used to work at the Labor Department. Right now, the department has its hands full, he said.

“It seems they spent the first year replacing policies that they didn’t agree with from the Bush administration, and now they are moving forward with their own agenda,” Mr. Campbell said.

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