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Market Update
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U.S. Benefits - Retirement
Printable Version
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Target Date Funds: DOL and SEC Joint Hearing Summary
On June 18, 2009, the Department of Labor (DOL) and the Securities and Exchange
Commission (SEC) took an unprecedented step in holding a joint hearing to discuss
target date funds used in retirement plans. Within the last five years, and particularly
after the passage of the Pension Protection Act in 2006, the proliferation of target date
funds (TDFs) in retirement plans has been remarkable. This growth, coupled with the
economic climate and subsequent market downturn of the past year, brought TDFs,
their use, and participant experiences with them to the forefront and precipitated the
joint hearing.
As panelists from all areas of the industry provided testimony (representatives of interest
groups for plan sponsors, plan participants, portfolio managers of target date strategies,
financial consultants and general counsels) a recurring discussion around four core issues
dominated the conversation:
- The difference between managing “to” or “through” retirement
and the affect it has on equity allocation in portfolios (especially upon
retirement);
- Methods of communication of portfolio strategies to plan sponsors and, more
importantly, plan participants;
- Current disclosures provided by fund managers and the amount
of information conveyed (or lack thereof) regarding portfolio
construction and the risk/return profile resulting from that construction;
- Regulation on target date funds and whether further oversight needs to
be provided by the governing bodies.
Getting There or Going the Distance
On the issue of managing “to” or “through” retirement, panelists agreed that no one
solution fits all, yet dissented on the appropriateness of “to” or “through” strategies.
Arguments ranged from taking into consideration the average age of a participant
population to the need, or lack thereof, for generating income during retirement. TDFs managing “to” retirement become more
conservative as a person nears 65, at which point equity allocations range from 30-50 percent. TDFs managing “through” retirement aim
for asset growth 20-30 years after retirement, and therefore hold up to 70 percent equities at age 65. Clearly, participants nearing retirement
who did not understand the difference in these strategies, and the consequent equity exposure, endured a shock when their nest egg
suffered 30 percent or greater losses in 2008.
Hey Joe, Did You Know You Own Google?
The experiences from the recent market collapse led to another question: how are portfolio strategies of TDFs communicated to
participants and do participants understand the risk they are subject to in TDFs? Many studies show that a number of participants believe
the TDF option in their retirement plan has some sort of guarantee attached to it. Not only is this false, but disconcerting given the use of
TDFs as default investments. At the hearing, fund managers argued that all of the information one would need to understand the portfolio
strategy of TDFs can be found in the prospectus. Now I ask . . . when was the last time you read a mutual fund prospectus?
Panelists reached a consensus that better education must be provided to plan sponsors and participants. Plan sponsors need to follow
a diligent, documented process when deciding what target date fund family to offer their participants, a process that outlines their
understanding of the portfolio strategy of the funds and the appropriateness of those funds for their participants. In addition, fund
managers, plan sponsors and recordkeepers must work together to provide participants with education regarding the strategy and risk
inherent in TDFs.
Regulate, Legislate or Leave Well Enough Alone
So what is next? As of now, the SEC and DOL refrained from recommending regulation or legislation. However, it has only been
two months since the hearing and the potential for further discussion is certainly possible. Undoubtedly, there is a need for additional
information and disclosures to be provided to participants to promote the understanding of what target dates funds entail, how they are
structured, that no two “2010” funds are alike and how they differ. The responsibility of providing enhanced education must be shared
by fund managers who structure the portfolios, the recordkeepers who provide education, the plan sponsors (and their investment
committees) choosing the portfolios, and the advisers lending guidance and recommendations to the plan sponsors. With better education
for participants, further regulation surrounding portfolio construction may be avoided.
While no further efforts to legislate or regulate are impending, an important dialogue began June 18th that it will be in everyone’s best
interest to continue. Only further communication and understanding between the involved parties will lead toward a better environment for
those who need it most (the plan participant) and the avoidance in the future of a situation like the one we are currently experiencing.
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for further information regarding any information
contained in this market update. |
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Brennan Hogan
Investment Analysis
Lockton Financial Advisors, LLC
Lockton Investment Advisors, LLC
Washington, D.C.
Tel: 202.414.2446
E-mail: bhogan@lockton.com |
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offered through Lockton Investment Advisors, LLC,
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Services, LLC, license number 0G13569.
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