Does Your 401(k) Plan Offer a Target Date Fund? Get Ready for Even More Participant Disclosures
Recent surveys indicate that about three quarters of defined contribution plans offer target date funds as investment options. These are funds in which investments are tailored to a participant’s projected retirement date, becoming more conservative over time. Many plans added target date funds after they were designated by the U.S. Department of Labor (DOL) as “qualified default investment alternatives”, also known as “QDIA’s”, which are safe harbor investments for fiduciaries to select for participants who don’t make their own elections. They also became widely available as non-QDIA investment choices.
If your 401(k) plan is part of this trend and now includes target date funds (i.e., funds with names such as “Retirement 2030 Fund” or “Target 2030”) as part of its investment menu, the odds are that the fiduciaries who select the investment menu and the participants do not really understand how the funds work. At least, that was the conclusion of the DOL and Securities and Exchange Commission, which held a hearing on target date funds earlier this year. The hearing and numerous surveys have indicated that funds with the same target date may have widely differing investment strategies, risk profiles, and proportions of equity to fixed income investments at and into retirement.
The DOL and SEC issued an Investor Bulletin addressing target date funds with advice to help evaluate these funds. The DOL recently also proposed regulations requiring special participant disclosures for target date funds, even if participants are not defaulted into them, and for other “qualified default investment alternatives”. These new rules are in addition to the new participant disclosure requirements discussed in a previous blog post.
In the future, participants would be required to be given:
- A narrative explanation of how a target date fund’s asset allocation will change over time, and the point in time when it will reach its most conservative position.
- A graphical illustration of how a target date fund’s asset allocation will change over time.
- For a fund that references a particular date, such as the “Retirement 2050 Fund”, an explanation of the relevance of the date.
- A general warning that the target date fund may have losses and does not guarantee that sufficient assets will be available for retirement.
- For any QDIA, principal strategies and risks of the QDIA, more information about fees and expenses, and historical performance data consistent with the final disclosure regulations that will apply to all participant directed investments.
The DOL indicates that it intends to provide a checklist for fiduciaries who have or are considering target date fund investments. In the meantime, here are some tips for fiduciaries to consider:
- All “Retirement 2050 Funds” are not equal. They may have widely differing investment results. In addition, if the target date fund invests in other mutual funds, fees that must be taken into account in evaluating the fund may be charged by both the target date fund and its underlying mutual funds.
- Target date funds might be appropriate but don’t forget there are other possible QDIAs, including balanced funds and managed accounts.
- Plan fiduciaries can protect themselves by providing additional information to participants about target date funds, and providing general investment education without waiting for these proposed regulations to be finalized.
