<nobr>Dec 18, 2009</nobr>

Senate Aging Chairman Seeks to Strengthen Fiduciary Oversight of Target Date Funds

Senate Special Committee on Aging Chairman Herb Kohl (D-WI) on December 16 announced his intent to introduce legislation to require target date fund managers to assume fiduciary responsibility in order for such funds to be eligible for Qualified Default Investment Alternative (QDIA) status.

Target-date funds have been the subject of previous hearings by Kohl, and were the topic of a June hearing jointly held by the Securities Exchange Commission and Department of Labor. Kohl has cited as problems with target date funds the lack of transparency and consistency in the design, funds that charge excessive fees, and fund managers having a conflict of interest in constructing target date funds.

In announcing his intent to introduce legislation, Kohl said 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." Kohl also cited a report published by Bloomberg that found six of the nine largest U.S. target-date fund providers contain junk bonds in their 2010 portfolios.

Referring to a recent DOL advisory opinion stating that fiduciary responsibility of target date funds currently resides with the employer, Kohl said 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." He added that 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," and that it is "critical that the fiduciary responsibility rest with someone so that default investors are protected."

Meanwhile, the Department of Labor and SEC continue looking into increased disclosure requirements for target date funds.

Questions or comments on this issue should be addressed to Kathryn Ricard, kricard@eric.org.

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Websites:

Sen. Kohl Press Release

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