WASHINGTON BUREAU — Target date fund (TDF) providers should make sure 401(k) plan sponsors and participants understand the risks involved with using the funds as default investment options, according to officials at the U.S. Government Accountability Office (GAO).
The U.S. Department of Labor also should take additional steps to ensure that individuals using target date funds to save for retirement understand the advantages and disadvantages of taking that approach, GAO officials say in a report on target date fund disclosures.
STABILITY: NOT A DEFAULT OPTION
Target date funds are investment funds that are supposed to be invested in such a way that asset allocations shift more toward fixed-rate investments as the targeted participants approach their anticipated retirement age.
The Labor Department has been looking at target date funds in connection with efforts to update guidelines on how 401(k) plan sponsors should handle plan participants who fail to say how they want their plan assets allocated.
In the past, many employers used savings accounts, money market funds or stable value funds backed by insurers as the default investment. Critics of that approach argued that the fixed-return investments had a low potential rate of return and failed to suit the needs of long-term retirement savers.
When Congress drafted the Pension Protection Act of 2006, it included a provision asking the Labor Department to create a list “qualified default investment alternatives” (QDIAs) that would make suitable default investment options.
Regulators included target-date funds on the list, but, just as stock prices were about to plummet, they left out stable value funds and other fixed-rate products sold by insurers.
Since the QDIA guidance was issued, target date funds have become “by far” the most popular QDIA, GAO officials say.
Many retirement plan participants were surprised to learn that target date funds aimed at older participants were as volatile as they proved to be, and some participants were surprised to find that target date funds could lose money.
In November 2010, the Labor Department proposed a QDIA regulation update that
calls for retirement plan participants to get more information about the target-date funds offered on plan investment menus.