Federal regulators are questioning the performance of retirement savings funds that are supposed to shift toward more conservative allocations as participants near retirement age.
Concerns about “target date funds” surfaced today in Washington at a hearing organized by the U.S. Department of Labor.
One participant, U.S. Securities and Exchange Commission Chairman Mary Schapiro, acknowledged that target-date funds have become an increasingly popular, “set it and forget it” savings option.
“But the reality of target date funds was quite surprising to many investors last year,” Schapiro said at the hearing, according to a written version of her remarks.
In 2008, the performance of what should have been the most conservative target-date funds – funds aimed at participants expecting to retire in 2010 — ranged from minus 3.6% to minus 41%, Schapiro reported.
“These varying results should cause all of us to pause and consider whether regulatory changes, industry reforms or other revisions are needed with respect to target date funds,” Schapiro said.
Ian Kopelman, the legal counsel for the Profit Sharing/401(k) Council of America, Chicago, urged regulators to adopt a long-term perspective when looking at target-date funds.
“Plan investments are for long-term investing, and questioning their propriety based on short-term performance will create havoc for the employer provided retirement plan system,” Kopelman said, according to the written version of his testimony. “Even prudent investors can suffer an investment loss!”
In 2008, Kopelman said, the PSCA found that 58% of private-employer defined contribution retirement plans offered target-date funds in 2008, up from 25% in 2005.
In April, another PSCA survey collected responses from about 400 plan sponsors that have been using target-date funds.
“Most plan sponsors in the survey are satisfied with their target-date investment options, despite weak performance during the recent market crisis,” Kopelman said. “Only 13% of sponsors are dissatisfied, and only 1% [are] very dissatisfied.”
One question concerns the amount of stock that a participant nearing retirement should hold, Kopelman said.
“The overwhelming body of financial advice indicates that a new retiree should hold a substantial percentage of equities in their retirement account, in the general area of 50%,” Kopelman said. “This position is not influenced by a short-term value fluctuation at retirement. It is based on the 20- to 25-year investment horizon for a recent retiree. A plan fiduciary is, to a large degree, bound by this body of expert knowledge and ignores it at considerable risk.”
The assumed stability of Social Security and defined benefit pension income is another factor that affects the amount of risk that a typical retiree can take, Kopelman said.
The PSCA believes the target-date fund asset allocation shifting schedule, or “glide path,” “should extend throughout the life of the participant or beneficiary if the plan permits retired participants, terminated employees, or beneficiaries to remain in the plan beyond the normal retirement age,” Kopelman said.
Allison Klausner, an assistant general counsel at the American Benefits Council, Washington, recommended that lawmakers and regulators focus on whether the plan decision-maker is following prudent fund selection procedures, rather than imposing fund feature mandates.
“Any regulations promulgated should permit plan fiduciaries to make prudent decisions appropriate for its body of plan participants,” Klausner said. “We ask the agencies to respect that one size and one style will not be best for all plans.”
Mark Wayne, who represented the National Association of Independent Retirement Plan Advisors, Arlington, Va., said the Labor Department and the SEC should require target-date fund managers to give more information about asset allocation strategies.
Typical language in a target-date fund prospectus describes the fund’s investment objective as simply to “provide capital appreciation and current income consistent with its current asset allocation,” which is clearly not enough information, Wayne said.