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Official: Maybe Target Date Funds Should Rename

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One investment fund that was supposed to be designed for workers retiring in 2010 had 68% of its assets in stock before the recent slump hit, and one 2010 fund lost 41% of its value in 2008.

Phyllis Borzi, the U.S. Labor Department assistant secretary in charge of the Employee Benefits Security Administration, reported those statistics today at a U.S. Senate Special Committee on Aging hearing on use of target date funds in 401(k) plans.

Around the time the stock market was peaking, the Labor Department was writing regulations to implement new laws that encourage employers to add automatic enrollment features to 401(k) plans, and to try to maximize the retirement plan investment income of participants who fail to say how they want to allocate their assets by designating “qualified default investment alternatives.”

Regulators refused to let employers use bank certificates of deposit, fixed annuities, stable value funds or other fixed-income investments as QDIAs, arguing that using those investment options would expose plan participants to too much inflation risk.

Regulators encouraged employers to use target date funds as QDIAs, on the assumption that the funds would become more conservative as participants neared retirement age. Most investment and personal finance experts say older workers should keep a higher percentage of their assets in relatively safe assets that offer a fixed rate of return, or a minimum guaranteed rate of return, because they have little time to recover if a slump cuts the value of their holdings.

In reality, before the financial crisis erupted, many target date funds marketed to workers near retirement “held about half of the holdings in stocks, following glide paths that did not significantly reduce that percentage for 5 years or more after the average investor retired,” Borzi testified, according to a written version of her remarks.

When talking about a government responses to concerns about the high percentage of stock held in many target date funds aimed at older workers, government officials at the hearing talked mainly about changes in disclosure rules.

This summer, many members of a Labor Department advisory panel opposed the idea of setting limits on the amount of stock that target date funds designed for plan participants nearing retirement can hold, Borzi said.

Instead, panelists recommended that the near-retirement target date funds disclose whether their “glide path,” or schedule for becoming more conservative, is designed to manage assets “to or through retirement,” Borzi said.

Andrew Donohue, director of investment management at the U.S. Securities and Exchange Commission, says the SEC may try to change the rules for target date fund sales materials, to keep investment companies from implying that the funds are simpler than they are.

The SEC also may try to improve disclosure by limiting how investment companies name target date funds, to keep the names from misrepresenting the nature of a fund’s holdings, Donohue said.

Copies of the witnesses’ written testimony and other hearing documents are available here.


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