Sen. Kohl targets target date fund managers

Legislation that in some cases would require target date fund managers to take on fiduciary responsibilities will be introduced by Senate Special Committee on Aging Chairman Herb Kohl, D-Wis., the senator announced today. Mr. Kohl said the legislation is aimed at employers who want to use target date funds as automatic investments for 401(k) participants who do not select their own investments. To be able to do so, he wants to require target date fund managers to take on the heightened regulation and legal liability of acting as a fiduciary. Mr. Kohl's committee has examined target date funds and found that many of the funds, which are supposed to be managed more conservatively as people get closer to retirement, suffered huge losses in portfolios intended for people near retirement. “The discovery that many 2010 target date funds contain junk bonds is troubling, but not surprising,” Mr. Kohl said in a statement. “Many target date funds are composed of hidden underlying funds that can have high fees, low performance or excessive risk. With more than 90% of employers choosing off-the-shelf target date funds as their employees' standard option, there is no question that we need greater regulation and transparency of these products.” Last week, the Labor Department released an advisory opinion stating that the fiduciary responsibility for target date funds currently resides with employers. But employers are often unaware of investments in the funds, according to the release, issued by Mr. Kohl. Increasing employers' fiduciary liabilities may decrease the likelihood that they will adopt auto-enrollment policies. Auto enrollment has led to increased enrollment of employees in defined-contribution plans. “Target date products operate under less stringent fiduciary-responsibility guidelines,” Mr. Kohl said. “The problem is that the people who are defaulted into target date funds are the ones who need someone looking out for their financial interests the most.”