BrightScope slams the ICI's defense of target funds

The BrightScope 401(k) plan ratings service is skewering the Investment Company Institute over its defense of target date funds. In December, in response to increasing scrutiny of target date funds from members of Congress, the ICI published a paper, “Dispelling Target Retirement Date Fund Myths with Facts.” In the paper, the ICI gave its counterarguments to what it called six “myths” about target date funds. The ICI sought to refute the following statements: • Target date funds need new or different fiduciary standards. • The funds aren't transparent. • They involve conflicts of interest. • They use underperforming proprietary funds. • They often have high-fee funds. • Their use of high-yield bond funds is inappropriate. On its blog Tuesday, BrightScope responded to thes paper, attacking each of the points the ICI made. “The ICI list misrepresented many of the basic facts about target date funds and painted an overly rosy picture of the target date fund marketplace,” the firm said in its blog posting. “This paper intends to set the facts straight.” Among the points that Bright-Scope disputed is the contention by the ICI that the Investment Company Act of 1940 is sufficient in governing target date funds. Rather, Bright-Scope argued that these funds need to be regulated under the Employee Retirement Income Security Act of 1974. “With all the abuses that have been uncovered in the mutual fund industry, does the ICI really expect us to stick our collective heads in the sand?” the paper asks. “If these practices and more exist within the mutual fund already, is that the regulatory model we want to use to protect America's retirement savings. We argue that it is not,” according to the paper. BrightScope also argued that more disclosure is needed around the holdings in target date funds because large firms such as Morningstar Inc. are having trouble getting the information that they need to analyze these offerings. “If it is hard for Morningstar to get information it needs to analyze target date funds, imagine the burden placed upon plan sponsor fiduciaries and individual investors to determine the objectives and holdings of individual target date funds,” the company said in its posting. Ianthe Zabel, a spokeswoman for the ICI, said the group stands by the facts and analysis in its paper. “We are reviewing BrightScope's analysis and see nothing in their piece that changes the facts, the data, or our analysis," she said. E-mail Jessica Toonkel Marquez at [email protected].