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Retirement Planning: Lifetime Income, Target Date Funds To Center Stage

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Lifetime income and target date funds are taking center stage this spring, while a proposed Department of Labor regulation freshening up the term ‘fiduciary’ is likely on tap for this fall.

Senator Herb Kohl (D-Wisconsin), chairman of the Senate’s Special Committee on Aging, plans to hold a hearing June 16 on the topic of lifetime income, while the Department of Labor’s Employee Benefits Security Administration (EBSA) continues to sift through the 700 comment letters that it received regarding its request for information (RFI) on how best to integrate lifetime annuities and other income-generating options into 401(k)s and other employer-sponsored retirement plans.

In the first of a three-pronged initiative on target date funds, the EBSA and the Securities and Exchange Commission (SEC) released its long-awaited guidance on May 6 to help investors and plan participants better understand the operations and risks of target date funds.

Phyllis Borzi, assistant secretary of Labor for EBSA, said in remarks about the newly released guidance at the Investment Company Institute’s (ICI) general membership meeting in Washington on May 7, that “most [plan participants], and even the plan sponsors, maybe didn’t fully understand how widely these [target date] funds vary in their structure. So it became quite clear to [DOL and SEC] that we needed to do something to help people better understand.”

EBSA says the guidance describes some basic features of target date funds, including the investment mix of such funds, the risks associated with the investments, how target date funds operate, and ways to evaluate a target date retirement fund that will help increase awareness of both the value and risks associated with these types of investments. The guidance is called “Investor Bulletin: Target Date Retirement Plans,” and is available on EBSA’s Web site at and the SEC’s Web site at

Best Practices for Fiduciaries

Phase two of the target date fund initiative, Borzi said at the May ICI event, will be a “best practices checklist” for plan fiduciaries to use; the checklist, which Borzi said will be out in a matter of weeks, is designed for small- and medium-sized plan sponsors. The third piece of the initiative will include an amendment to the Qualified Default Investment Alternative (QDIA) regulation as it relates to target date funds, Borzi said.

Ron Surz, principal of Target Date Analytics in San Clemente, California, says that “enlightened fiduciaries” should focus on what he calls the “Risk Zone” when choosing target date funds. This Risk Zone, Surz explains, is the “five to 10 years leading up to and immediately following retirement, when your account is most susceptible to lifestyle risk.” This is the period, he says, “when savings are at their highest level, and your only response to loss is a reduced standard of living since going back to work is generally not an option. It is the reason that the focus was on 2010 funds at the joint SEC/DOL June 2009 hearings on target date funds.”

Surz goes on to point out that target date funds “have a wide range of equity exposures in the Risk Zone. They disagree about the appropriate level of risk. Prior to this dangerous period, most target date funds are allocated about the same. When viewed over the continuum of their lives, target date funds look deceptively similar; their hidden risk is only visible when one examines the Risk Zone.”

As quite a few mutual fund executives noted at the ICI conference, target date funds are becoming the most popular default option in 401(k) plans. Greg Johnson, president and CEO of Franklin Resources, said at the event that target date funds will become a “bigger and bigger” part of the new money that’s flowing into 401(k)s.

Borzi also reminded attendees that EBSA is “taking a fresh look” at the definition of fiduciary, and won’t be issuing a proposed regulation in this area until later this fall. “We need to look at the fundamental regs that were issued after ERISA, and bring those up to date,” she said. Fiduciary duty “is the lynchpin” of DOL’s enforcement activities.

Washington Bureau Chief Melanie Waddell can be reached at [email protected].