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Lawmakers Ask Government Watchdog to Probe Target Date Funds

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What You Need to Know

  • Expenses and risk allocations vary considerably among funds.
  • More than $1.5 trillion is invested in TDFs.
  • Lawmakers want to know how market fluctuations as a result of the COVID-19 pandemic have affected TDF participants.

The House Committee on Education and Labor and the Senate Committee on Health, Education, Labor, and Pensions (HELP) want the Government Accountability Office to review target date funds, as they’re concerned certain aspects of TDFs may be placing retirement savers at risk.

TDFs are often billed as “set it and forget it” investments, yet expenses and risk allocations vary considerably among funds, the lawmakers told GAO.

“The millions of families who trust their financial futures to target date funds need to know these programs are working as advertised and providing the retirement security promised,” the lawmakers told the government watchdog.

The lawmakers noted that more than $1.5 trillion is invested in TDFs, which are often the default investment option for employer-based retirement plans.

During a hearing held Thursday by the Senate HELP Committee titled Retirement Security: Building a Better Future, Lori Lucas, president and CEO of the Employee Benefit Research Institute in Washington, said that “the typical worker is in a target date fund when they are automatically enrolled” in a workplace savings plan. “The point of the target date funds are to be well-diversified.”

Lucas said that “more than three-quarters of 401(k) plans, covering more than three-quarters of 401(k) plan participants, included target-date funds in their investment lineup.”

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Just over one-quarter of the assets in the EBRI/ICI 401(k) database, Lucas told the lawmakers, “were invested in target date funds, and more than half of 401(k) participants in the database held target date funds.”

In their letter to GAO, Sen. Patty Murray, D-Wash., chair of the HELP Committee, and Rep. Bobby Scott, D-Va., chair of the Education and Labor Committee, said they were also concerned about use of alternative investments in target date funds.

“While TDFs have traditionally included a mix of equities and fixed-income investments, the Department of Labor under the Trump Administration paved the way for the use of potentially higher risk and more lightly-regulated ‘alternative’ assets, such as private equity,” Murray and Scott told GAO. “Little is known about the extent to which TDFs offered in employer-provided retirement plans include alternative assets and how those TDFs with alternative assets impact participants’ fees and returns.”

Murray and Scott asked GAO to probe a number of questions, including the extent to which TDFs include alternative assets, such as hedge funds or private equity as well as the types of information that are typically available to participants and plan sponsors about the risks and benefits of asset allocations in TDFs.

The lawmakers also want to know to what extent have participants approaching retirement age who are invested in TDFs have been affected by market fluctuations as a result of the COVID-19 pandemic.