Senator Kohl Announces Intent to Strengthen Fiduciary Oversight of Target-Date Funds
WASHINGTON, DC, December 16, 2009 -- Today U.S. Senator Herb Kohl (D-WI), chairman of the Senate Special Committee on Aging, announced his intent to introduce legislation that will require target-date fund managers to take on a fiduciary responsibility in order for such funds to be eligible for the designation of Qualified Default Investment Alternative (QDIA). target-date funds, sometimes called lifecycle funds, are a type of mutual fund that is supposed to automatically rebalance to a more conservative asset allocation as the participant approaches their target retirement date. Since the U.S. Department of Labor (DOL) designated target-date funds as an appropriate default investment option in 401k plans, they have experienced an explosive growth in popularity.
The huge losses suffered during the economic downturn by target-date fund participants on the brink of retirement raised concerns about the design and transparency of these funds. Over the past year, the Aging Committee has examined the excessive stock risk found in many 2010 funds, issuing a report on the topic in February. At an October hearing on strengthening the 401k system, the Aging Committee heard testimony concerning the difficulty of determining the underlying composition of target-date funds. Witnesses demonstrated that these funds are often created with inherit conflicts of interest, and are often composed entirely of proprietary products. Kohl reacted to a report published today by Bloomberg that found six of the nine largest U.S. target-date fund providers contain junk bonds in their 2010 portfolios.
"The discovery that many 2010 target-date funds contain junk bonds is troubling, but not surprising. Many target-date funds are composed of hidden underlying funds that can have high fees, low performance, or excessive risk. With more than 90 percent of employers choosing off-the-shelf target-date funds as their employee's standard option, there is no question that we need greater regulation and transparency of these products," said Kohl.
Last week DOL released an advisory opinion stating that fiduciary responsibility of target-date funds currently resides with the employer. The problem is that employers are often unaware of the investments which compose each target-date fund, as they are determined by a fund manager. Further, increasing the fiduciary liability for employers in the case of QDIAs may decrease the likelihood that they will adopt auto-enrollment policies and therefore reduce the retirement security of their employees. However, is critical that the fiduciary responsibility rest with someone so that default investors are protected. Kohl's forthcoming legislation will improve the scrutiny of target-date funds by expanding the fiduciary responsibility of target-date fund managers.
"As it stands, target-date products operate under less stringent fiduciary responsibility guidelines. The problem is that the people who are defaulted into target-date funds are the ones who need someone looking out for their financial interests the most," Kohl said. "We need to ensure that automatic enrollees benefit from the same fiduciary protections as other investors."
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