Target date fund suggestions could do more harm than good

Though the Government Accountability Office’s suggestions to the Labor Department for additional guidance on target date funds are well-intentioned, they aren’t terribly helpful and are not likely to become a reality, ERISA lawyers said.
“They’re augmenting what the Department of Labor is doing,” said Ary Rosenbaum, an attorney at The Rosenbaum Law Firm PC and a specialist in the Employee Retirement Income Security Act of 1974. “The GAO is attempting to be bigger on providing information, but you could be giving participants too much information and confusing them.”
In a report released yesterday, the GAO highlighted the fact that the investment compositions of target date funds vary wildly, as do their returns. The group’s study also revealed that plan sponsors face difficulties in comparing, selecting and monitoring target date funds for their retirement plans, and that the level of due diligence among plan sponsors varies.
As a result, the GAO pitched three regulatory suggestions to the department. First, it asked the regulator to amend rules on qualified default investments so that fiduciaries are required to document that they’ve considered participant characteristics aside from age or retirement date in choosing a default investment.
Second, the organization suggested that the Labor Department provide guidance to plan sponsors on the limits of existing target date fund benchmarks and to consider a fund’s long-term strategy and allocations.
Finally, the GAO asked the DOL to broaden a provision in the final regulation for target date funds, requiring that participants get a statement on the consequences of withdrawing or managing target date fund assets in a way that deviates from the fund’s assumptions.
While the Labor Department said it will consider the final two recommendations, it demurred on the suggestion that plan sponsors document that they’ve considered other employee characteristics before choosing a qualified default investment alternative.
“The department considered and rejected the approach recommended by the GAO in developing the final QDIA regulation,” Phyllis C. Borzi, assistant secretary of the DOL’s Employee Benefits Security Administration, wrote in a letter to the agency.
The recommendation would have been redundant, said Bradford P. Campbell, an attorney at Schiff Hardin LLP. Current department regulations already require plan fiduciaries to weigh all factors when selecting investments for their retirement plans.
“The DOL was right to respond that it didn’t agree with that recommendation and that it had rejected that type of thinking,” he said.
Meanwhile, the requirement that participants get more information on the consequences of handling their target date assets in a manner that’s different from the fund’s assumptions would likely just leave employees awash in more paper.
“It’s a slippery slope: Too little information is no good, and too much is no good,” Mr. Rosenbaum said. “One of the problems I have with plan sponsors and participants is that they don’t read anything, and if you give them more information, you raise the likelihood that they won’t read it.”
The DOL has been weighing comments it has received from its proposed enhanced disclosures for target date funds in retirement plans. The comment period on the proposed rule ended last month.
While the suggestions in the GAO’s report aren’t likely to shift the department’s rulemaking approach, it could encourage members of Congress to come up with bills in an attempt to override the DOL’s regulation, Mr. Campbell said.
“It’s not at all unusual for legislation to float around and contradict the regulatory process,” he added. “But by the time the DOL’s regulation is on its agenda, it’s something the department is committed to pursuing. You’re more likely to see regulation than successful legislation.”