US Labor Department Proposes Rule to Enhance Target Date Retirement Fund Disclosures

The U.S. Department of Labor’s Employee Benefits Security Administration has issued a proposed rule that will help America’s workers better understand target date retirement funds and other similar investments offered in 401(k)-type pension plans.

The proposed rule would amend the “qualified default investment alternative regulation” and the “participant-level disclosure regulation” to enhance and provide more specificity regarding the information that must be disclosed to participants and beneficiaries concerning investments in target date funds.

“Based on our collaborative examination of this issue with the Securities and Exchange Commission, it is clear that all participants in participant-directed individual account plans can benefit from better information about how target date investments are designed to meet their retirement savings needs,” said Assistant Secretary of Labor for EBSA Phyllis C. Borzi.

Background

EBSA is responsible for administering and enforcing the fiduciary, reporting, and disclosure provisions of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). The agency oversees approximately 708,000 private pension plans, including 483,000 participant-directed individual account plans such as 401(k)-type plans.

A “participant-directed plan” is a plan that provides for the allocation of investment responsibilities to participants or beneficiaries. An estimated 72 million participants are covered by these participant-directed plans, which contain nearly $3 trillion in assets. Many of these plans include TDFs.

TDFs are designed to make it more convenient for individuals saving for retirement - they allocate investments among different asset classes, and change that allocation to become more conservative over time.

However, TDFs are not managed according to uniform strategies. TDFs with the same target date can have very different investment strategies and asset allocations. Participants and investors may not understand these differences, which can lead to very different levels of risk and investment results over time.

In June 2009, EBSA and the Securities and Exchange Commission held a joint public hearing to explore issues related to TDFs, including how they are managed at the investment level, how they are selected by plan fiduciaries and by investors, and how information about them is disclosed to plan participants and investors.

The proposed amendments require new disclosures about the design and operation of target date or similar investments, including an explanation of:

- The investment’s asset allocation.

- How that allocation will change over time, with a graphic illustration.

- The significance of the investment’s “target” date.

The proposed amendments also require a statement concerning the risk that a participant investing in a TDF may lose money in that investment, even close to retirement.

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