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.