On November 29, 2010, keeping in line with its goal to enhance ERISA plan disclosures, the Department of Labor’s Employee Benefits Security Administration announced a proposed rule to help plan participants better understand target date retirement funds. Specifically, the proposed rule would expand the information required to be disclosed to plan participants and beneficiaries concerning investments in target date funds.
Many target date funds are found within participant-directed plans, which are ERISA plans that provide for allocation of investment responsibilities to participants or beneficiaries. According to the Department of Labor, an estimated 72 million participants are covered by participant-directed plans, which contain nearly $3 billion in total assets.
Target date funds have become popular with 401(k) plan participants because they allocate investments among different asset classes such as stocks, bonds and cash equivalents. But unlike other mutual funds, target date funds automatically reallocate their asset mix according to a set time frame that is appropriate for a particular participant. Generally, the funds are set up to become more and more conservative as the participant nears retirement age to minimize the participant’s risk.
Despite their convenience for investors, many plan participants do not realize that investing in a target date fund is not a “one-size-fits-all” investment strategy. Indeed, target date funds with the same target date may have very different investment strategies and asset allocations. This distinction is dangerous for plan participants because the varying investment strategies and asset allocations can lead to very different investment results over time. Unless plan participants understand this, they run the risk that these “autopilot” funds will earn too little for their retirement needs.
The new proposed rule would amend the “qualified default investment alternative regulation” (29 C.F.R. § 2550.404c-5) and the “participant-level disclosure regulation” (29 C.F.R. § 2550.404a-5) to require new disclosures about the design and operation of target date funds, including:
• The investment’s asset allocation;
• How that allocation will change over time, with a graphic illustration; and
• The significance of the investment’s “target” date.
Comments on the proposed rule must be received by January 14, 2011. A copy of the proposed rule can be found here.