WASHINGTON BUREAU — Retirement plan vendors and retirement plan advisors are asking the Employee Benefits Security Administration (EBSA) to clarify a target date fund disclosure proposal.
The SPARK Institute, Simsbury, Conn., a group for retirement services vendors, says a "glidepath" illustration provision in the draft regulations is too vague.
SPARK members worry that the standard, as written, "lays the groundwork for significant needless and frivolous litigation that will be based on disputes about the clarity of charts and illustrations," Larry Golbrum, SPARK's general counsel, writes in one comment letter.
The American Society of Pension Professionals and Actuaries (ASPPA), Arlington, Va., a group for retirement plan advisors, also has sent EBSA a letter asking for changes in the glidepath illustration proposal.
THE PROPOSED REGULATIONS
EBSA, an arm of the U.S. Labor Department, released the draft regulations in November 2010, to amend a qualified default investment alternative (QDIA) regulation and a participant-level disclosure regulation.
The underlying QDIA regulation sets guidelines for handling 401(k) plan participants who do not say how they want their share of plan assets allocated. Congress passed a QDIA law in 2005, out of concern that too many plans were making fixed-rate, low-return investments the default investment option. The QDIA regulation, put into effect shortly before stock prices slumped, encourages plan sponsors to use options such as target date funds as the QDIA and discourages 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.
A typical target date fund is supposed to serve a group of retirement plan participants who expect to retire on or around a specified year. The investment management "glidepath" is the strategy for shifting toward lower-risk investments as participants near their anticipated retirement age.
The glidepath illustration provision in the EBSA proposed regulations requires that a plan administrator include a chart, table or other graphical representation that illustrates the change in a fund's asset allocation over time in a way that "does not obscure or impede a participant's or beneficiary's understanding of the information explained."
SPARK
At SPARK, Goldbrum is asking that the current illustration language be changed, and that EBSA use new language stating that the target date fund "chart, table or illustration is presented in a manner calculated to be understood by the average participant."
That language should work better, because it is language that EBSA has used in other regulations, Goldbrum says.
Goldbrum also comments on other aspects of the proposed regulations, such as provisions requiring that plans give participants more detailed fee and performance information.
Some of the information required may not be relevant to, or may not be available from, the investment management services that run managed accounts programs, Goldbrum says. SPARK wants EBSA to require plans to disclose the identity of managed accounts program investment managers. But SPARK also wants EBSA to modify the fee disclosure requirements for managed accounts programs and ree the programs from the kinds of performance data reporting requirements that mutual funds will face.
SPARK is asking EBSA to give employers 1 year to comply with the completed regulations, rather than just 90 days as stated in the draft regulations. "Providing more time will not only improve the quality of compliance but will also help plan sponsors and service providers to manage the cost of doing so," Goldbrum says.
ASPPA
Like SPARK, ASPPA says the rules for the target date fund glidepath illustrations are vague.
"Given the ambiguity in the language in the Proposed Regulation, plan fiduciaries will have difficulty determining whether they have satisfied this requirement," ASPPA Executive Director Brian Graff and other ASPPA leaders write in the ASPPA comment letter.
EBSA could clarify matters by using the same standard it uses for benefit plan summary plan descriptions, ASPPA leaders say.
Today, employers must provide summary plan descriptions written "in a manner calculated to be understood by the average plan participant," ASPPA leaders say.
ASPPA leaders would like to see 401(k) plan participant disclosures include statements about the possible impact of taking lump-sum cash distributions out of 401(k) plans at retirement. ASPPA leaders say disclosures also should warn retirees about the planning challeges facing spouses of different ages, such as a 70-year-old retiring spouse who has a 55-year-old spouse with a 30-year life expectancy.
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