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Regulation and Compliance > Federal Regulation

Target-Date Funds: Labor Proposes QDIA Rule Amendment

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WASHINGTON BUREAU — The U.S. Department of Labor is calling for retirement plan participants to get more information about the target-date funds offered on plan investment menus.

The proposed regulation would amend the department’s qualified default investment alternative (QDIA) regulation and a participant-level disclosure regulation.

The existing regulations set guidelines for how 401(k) plan sponsors should handle plan participants who do not say how they want plan assets allocated.

Congress developed the framework for the QDIA regulations in 2005, out of concern that too many plans were making fixed-rate investments with a low potential rate of return the default investment option.

The Labor Department’s QDIA regulations, put into effect shortly before stock prices slumped, encourage plan sponsors to use options such as target-date funds as the QDIA and discourage sponsors from using fixed annuities or stable-value funds as the default option.

The proposed regulation would require issuers of target-date funds and similar funds used as QDIAs to tell investors about the fund’s initial asset allocation; provide a graphic showing how the allocation will change over time; and discuss the significance of the investment’s “target” date.

Fund issuers also would have to give participants a statement concerning the risk that a participant investing in a target-date fund might lose money in that investment, even close to retirement.

The proposed regulation is set to appear in the Federal Register Tuesday.

The American Council of Life Insurers (ACLI), Washington, says it will discuss

the proposal with member companies before stating an official opinion.

In August, the ACLI sent a comment letter on the target-date fund topic to the U.S. Securities and Exchange Commission (SEC), which has been developing its own target-date fund regulations and was preparing to submit a comment of its own to the Labor Department.

“ACLI supports the general objectives of the proposed rule amendments: to clarify sales literature, marketing and disclosure used in target date funds,” James Szostek, an ACLI vice president, writes in the ACLI’s comment letter to the SEC. “Through these initiatives, consumers will have enhanced information on which to make an informed purchase decision.”

The Labor Department seems to have accepted one of the ACLI recommendations.

The ACLI said the provision requiring issuers to warn that the assets in a target-date fund are not guaranteed also “should require a statement that advises the investor that, in the absence of an insurance guarantee, the fund does not guarantee that the investor could support a particular rate of redemptions from the fund over the investor’s life or for any other period, i.e., the fund does not guarantee income in retirement.”

The proposed regulation includes a warning that retirement income adequacy is not guaranteed as well as a warning that the principal is not guaranteed.


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