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Congressional Leaders Call for GAO Review of TDFs

Target Date Funds

The Chairpersons of two of the leading retirement plan committees in Congress are calling for a review of…target-date funds.

Sen. Patty Murray (D-WA), Chair of the Senate Committee on Health, Education, Labor & Pensions, and Rep. Robert Scott (D-VA), Chairman of the House Committee on Education & Labor, have written to the head of the Government Accountability Office (GAO), asking them to conduct a review of target-date funds (TDFs).

“The employer-provided retirement system must effectively serve its participants and retirees, and we are concerned certain aspects of TDFs may be placing them at risk. TDFs are often billed as 'set it and forget it' investments, yet expenses and risk allocations vary considerably among funds. The millions of families who trust their financial futures to target-date funds, need to know these programs are working as advertised and providing the retirement security promised,” the letter to Gene Dodaro, Comptroller General of the United States, dated May 6, states.

In addition to expressing concerns about the amount of equity investment in 2020 target-date funds, the letter also calls out moves made by the Department of Labor under the Trump Administration which they say “paved the way for the use of potentially higher risk and more lightly-regulated ‘alternative’ assets, such as private equity.” The letter goes on to note that, “Little is known about the extent to which TDFs offered in employer-provided retirement plans include alternative assets and how those TDFs with alternative assets impact participants’ fees and returns.”

Among other things, the letter asks GAO to address the following:

  • Not only the percentage of defined contribution assets in TDFs, but what percentage of participants are offered, participated and defaulted into TDFs?
  • How participants approaching retirement age invested in TDFs been affected by market fluctuations as a result of the COVID-19 pandemic, and how much variation in the performance of TDFs of the same vintage (i.e., target retirement year), particularly for TDFs at or near the target retirement date?
  • What steps have TDF providers taken steps to mitigate the volatility of TDF assets?
  • How often do investors with default investment TDFs in their DC plans reassess their investments, and what, if any, is the cost of a passive investment stance in a “tumultuous market?”
  • How does the asset allocation and fee structure vary across those TDFs used as default options in 401(k) plans and how do those compare with other investment products?
  • To what extent do TDFs shift the allocation of equities to more conservative investments like fixed income in order to protect these participants from losses near retirement?
  • How are TDFs marketed and advertised, and are participants “sufficiently aware of the cost and asset allocation variation among TDFs?”
  • What percentage of plan sponsors select off-the-shelf TDFs, and what percentage select custom TDFs—and is there a material difference in the performance of the two?
  • To what extent do TDFs include alternative assets, such as hedge funds or private equity, and what information is typically available to participants and plan sponsors about the risks and benefits of asset allocations in TDFs?
  • What steps has the Department of Labor taken “to ensure that plan sponsors appropriately select and use TDFs and that sponsors provide appropriate information and education about these funds to plan participants?”
  • When provided the option to invest in TDFs (alongside an array of other investment fund options), how often and to what extent do plan participants rely primarily—or exclusively—on TDFs? In these scenarios, how many investment alternatives are provided and how many TDFs do plan sponsors generally offer in their investment options?

And finally, the letter asks GAO to consider the “possible legislative or regulatory options that would not only bolster the protection of plan participants, who are nearing retirement or are retired, but also achieve the intended goals of TDFs?”