The American Council of Life Insurers (ACLI) wants revised retirement plan disclosure notices to educate participants about the risk of depending on any variable-return fund for retirement income.
Three tax policy specialists at the ACLI, Washington – Walter Welsh, James Szostek and Shannon Salinas – make that argument in a letter commenting on a proposed retirement plan disclosure notice draft released by the Employee Benefits Security Administration (EBSA) in November 2010. EBSA is an arm of the U.S. Department of Labor.
The proposed regulation would amend the department's qualified default investment alternative (QDIA) regulation and a participant-level disclosure regulation.
The existing QDIA regulations set guidelines for how 401(k) plan sponsors should handle the assets of 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 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.
Comments were due Jan. 14, and EBSA received about 30 comment letters.
The ACLI tax policy specialists say the "could lose money" warning requirement appears to apply only to target date QDIAs.
"So that participants are not led into thinking that this risk is unique to QDIAs or target date funds, it may also be helpful to also include a general statement that this risk generally applies to investment funds with respect to which the return is not fixed," the tax policy specialists say. "
The proposed regulations also should require a statement that advises plan participants that, in the absence of an insurance guarantee, the fund does not guarantee that the plan participant could support a particular rate of redemptions from the fund over the participant's life or for any other period (i.e., the fund does not guarantee income in retirement)," the tax policy specialists say.
Jason Bortz and Joseph McKeever III have written a comment letter on behalf of the Committee of Annuity Insurers, Washington, suggesting that EBSA come up with disclosure rules designed specifically for managed accounts used as QDIAs.
The investment manager who runs a managed account program may make investment decisions based on detailed knowledge of a plan and its participants, such as access to other types of retirement programs, such as defined benefit pension plans, Bortz and McKeever say.
"To be clear, the Committee has no objection to disclosure requirements that are tailored to QDIAs that are investment management services," Bortz and McKeever say. "Our concern is merely that the current proposed rules are not suitable to these services."
A mutual fund has an issuer that can provide the kind of historic performance data that is supposed to go in the model notice, Bortz and McKeever say.
A managed account program has a manger, not an issuer, and "it is far from clear how an investment provider should construct historic performance data for a typical managed account option since the performance may be unique to each plan and may even be unique to each participant. It is not practical to provide the same types of historic performance data that are routinely made available for investment funds if this information is unique for every plan and even every participant."
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.