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Letter to DOL Details Target Date Fund Recommendations

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The American Benefits Council and the mutual fund industry have submitted a joint letter to the Department of Labor suggesting a list of potential items that fiduciaries of defined contribution plans should consider when selecting and monitoring the selection and monitoring of target date funds.

The letter is important to the insurance industry because a key business of insurance companies is administering defined contribution plans, while agents provide advice to beneficiaries of these plans.

Use of target date funds is growing as a result of rules issued by the agency in the wake of the Pension Protection Act of 2006.

That law mandated that the agency promulgate rules that phase out the use of guaranteed investment contracts that were commonly used as default investments.

GICs are mostly provided by insurance companies.

Regulations promulgated by the agency in 2008 mandated that GICs, as sold by insurance companies, could only be used as default investments for a short period of time.

GICs are relatively low-yielding, conservative products chosen by risk-adverse beneficiaries of defined benefit plans.

According to ABC and ICI, target-date funds are becoming the most popular alternatives to GICs in defined benefit plans.

The EBSA regulations barring long-term use of GICs established target-date funds as one of the qualified long-term alternatives.

The letter was written to officials of the DOL’s Employee Benefits Security Administration by officials of the ABC, which represents employers on retirement and other benefit issues before the DOL; and the Investment Company Institute, the trade group for the mutual fund industry.

The letter was written, it says, because EBSA is developing guidance to fiduciaries of retirement plans as to how they should evaluate target date funds as default investments.

According to the letter, the submission focuses “on the strong TDF oversight practices already in use by many plan sponsors and is designed to help fiduciaries of plans of all sizes develop effective practices.”

It deals with that the two trade groups believe “are the most universally applicable to any TDF and would be appropriate whether a TDF is offered as a mutual fund, collective trust, insurance company separate account, or other product.”

The letter cautions that, “It is important to note that the tool is not intended to identify every item that may conceivably be relevant to TDF selection and oversight, and some fiduciaries weigh additional items that are relevant to their particular plans.


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