In testimony October 28 before the Senate Special Committee on Aging, Phyllis Borzi, assistant secretary of labor for the U.S. Department of Labor's Employee Benefits Security Administration (EBSA), said DOL is considering a number of initiatives to assist plan fiduciaries and participants and beneficiaries in understanding the benefits, risks, and costs of plan investment options, including target date funds. An estimated 75% of 401(k) plans offer so-called lifecycle or target date funds as investment options for retirement plans. Borzi said that DOL is considering what disclosures should be made about target date funds and is re-examining DOL's QDIA regulation to ensure that meaningful disclosure is provided to participants when the plan's default investment is a target date fund. DOL is also considering, she said, whether it can assist plan fiduciaries by providing more specific guidelines for selecting and monitoring target date funds for their plans, whether as a default investment or more generally as one of several investment options offered by the plan. DOL also intends to withdraw the final rule implementing the investment advice provisions of the Pension Protection Act of 2006 (PPA) and accompanying class exemption that the DOL published in January 2009, Borzi said. "We intend to issue a new proposed rule that will support affordable and unbiased investment advice for 401(k)-type plans and IRAs." The new rule, she said, "will provide participants access to quality investment advice that will assist participants in choosing investments, including target date funds."
Reish & Reicher, a firm which specializes in employee benefits law, said in its most recent bulletin that it is seeing an increasing number of claims filed against advisors--both as civil lawsuits and FINRA arbitration cases. The firm notes that while "the increase in claims undoubtedly reflects the recent stock market losses, it is also the result of at least three other factors." Those are: an increasing awareness of the fiduciary standard; the growing focus on retirement savings, including rollovers to IRAs; and heightened expectations about the performance of advisors. There is, Reish & Reicher said, a fourth category: "crooks who steal money." Some of the claims that Reish & Reicher says it has seen include: encouraging employees to take early retirement or in-service distributions from retirement plans, and then investing the money in alternatives that are significantly more expensive than the investment expense in the plan; encouraging elderly people to invest, either individually or through their IRAs, in illiquid and expensive investments, some of which have become worthless; recommending investments that are "guaranteed" to return unrealistic amounts, for example, 10% per year or more in annual distributions from income; and the negligent recommendation of providers who subsequently embezzle funds from the plan, or otherwise cause avoidable losses to the plan.
Research by ReFlow, which makes tools that help investment funds manage the impacts of shareholder flow, found that the rollercoaster pattern of redemptions and subscriptions that mutual funds have been experiencing is not due solely to the market's upheaval over the past 14 months, but also reflects longer-term shifts in fund distribution and ownership. "In short, flow volatility is an ongoing trend that may not reverse even as the market recovers and net flows generally turn positive," said Paul Schaeffer, president of ReFlow, in a release announcing the white paper containing the research. This finding is significant, ReFlow says, as it counters the widely held belief that volatile asset flows are a temporary or cyclical phenomenon. While in 2008 the mutual fund industry experienced its first annual net outflow in 20 years, the volatility of monthly flows began rising in 2006, ReFlow's white paper states. Among reasons why asset flow volatility will continue to rise in the future: A fundamental shift from direct to intermediated mutual fund investing, whether through retirement plans, financial advisors, or other third parties; the move toward no-load funds, which allow investors to switch from one fund or asset class to another with no cost; and the growth of defined-contribution retirement plans, which produce constant inflows through employee paycheck deductions, as well as account withdrawals and rollovers when employees leave or change jobs.