Focus On Retirement Security
On May 6, 2021, the chairs of the Senate Committee on Health, Education, Labor & Pensions and the House Committee on Education & Labor published a letter[1] calling on the General Accountability Office (GAO) to review target-date funds (TDFs). The letter states their concern that certain aspects of TDFs may be placing participants and retirees at risk. It includes particular attention to the level of equity allocation risk in the years approaching and including the target retirement date. The letter calls out actions by the Department of Labor under the prior administration that sanctioned the use of alternative assets such as private equity in TDFs. No new guidance has been provided, however the GAO responded that it will proceed with a study which could take well over a year to complete.
What You Should Know
Legislators want to ensure that plan participants who invest in TDFs know that TDFs are working as advertised and are providing the retirement security they expect. They are concerned that the performance of TDFs and level of risk exposure can vary widely, even for those close to retirement.
The committee chairs asked the GAO to answer questions including:
- To what extent have participants approaching retirement age who are invested in TDFs been affected by market fluctuations as a result of the COVID-19 pandemic? How much variation is there in the performance of TDFs of the same vintage (i.e., target retirement year), particularly for TDFs at or near the target retirement date? To what extent have TDF providers taken steps to mitigate the volatility of TDF assets?
- How often do investors with default investment TDFs in their DC plans reassess their investments, and what, if any, is the cost of a passive investment stance in a tumultuous market? Are TDFs properly structured to withstand major stock turbulence?
- How does the asset allocation and fee structure vary across those TDFs used as default options in 401(k) plans? How do TDF fee structures compare with other investment products? In the years approaching retirement (i.e., age 55 and older), to what extent do TDFs shift the allocation of equities to more conservative investments like fixed income in order to protect these participants from losses near retirement?
- How are TDFs marketed and advertised? Are participants sufficiently aware of the cost and asset allocation variation among TDFs?
- What steps has the U.S. Department of Labor taken to ensure that plan sponsors appropriately select and use TDFs and that sponsors provide appropriate information and education about these funds to plan participants?
- What are possible legislative or regulatory options that would not only bolster the protection of plan participants, who are nearing retirement or are retired, but also achieve the intended goals of TDFs?
Plan sponsors whose plans offer TDFs should consider steps that include:
- Confirming plan fiduciaries understand how TDFs work, including reviews of underlying investments, risk profile, and the layers of fees in TDFs.
- Comparing the performance, risk, fees, and strategies of TDFs used in a plan with available alternatives.
- Assessing participant education and disclosures to ensure that communications concerning TDFs are thorough and appropriate for the workforce.
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