The U.S. Department of Labor’s Employee Benefits Security Administration and the U.S. Securities and Exchange Commission issued guidance on May 6, 2010, to help investors and plan participants understand the operations and risks of target-date fund investments.
Target-date funds, also known as life-cycle funds, are designed to provide a convenient way to invest for retirement by changing the fund's investment mix automatically to become more conservative as the fund’s target retirement date approaches. There can be significant differences among target-date funds in how they invest and how they reallocate assets between equity (stock) and fixed-income (bond) investments up to and after the fund's target date.
The guidance, Investor Bulletin: Target-Date Retirement Funds, is intended to help plan sponsors, participants and others to assess the benefits and risks associated with target-date funds and the appropriateness of including them as part of retirement portfolios. The bulletin describes how target-date funds operate, and ways to evaluate the value and risks associated with these types of investments.
For example, in comparing target-date funds offered by various providers, take note that "funds with the same target date may have different investment strategies and levels of risk. These variations may occur before the target date, and also at the target date and after it. Some target-date funds may not reach their most conservative investment mix until 20 or 30 years after the target date."
The bulletin also provides a list of additional resources to educate participants and other investors about retirement plans and mutual funds.
The DOL and SEC have indicated that their next steps for target-date funds will be:
• Joint publication of a compliance assistance checklist for plan fiduciaries.
• Proposed amendments to the ERISA regulations for qualified default investment alternatives (QDIA) requiring enhanced disclosure for plan participants.
• Continuing examination of how target-date funds are marketed.
Stephen Miller is an online editor/manager for SHRM.
Before they invest in a target-date fund, encourage participants to:
• Consider their investment style. Do they want to play an active role in managing their investments, or do they prefer the more hands-off approach of a target-date fund? They should be reminded to keep in mind, however, that even with a target-date fund, it is important to monitor the fund’s investments over time.
• Look at the fund’s prospectus to see where the fund will invest their money. Do they understand the strategy and risks of the fund, or of any underlying mutual funds held as investments?
• Understand how the investments will change over time. Are they comfortable with the fund’s investment mix over time? In particular, do they understand when the fund will reach its most conservative investment mix and whether that will occur at or after the target date? Does their level of risk tolerance match how aggressive or conservative it is?
• Take into account when they will access the money in the fund. How does the fund’s investment mix at the target date and thereafter fit with their plans, such as whether they intend to withdraw this money at retirement or to continue to invest?
• Examine the fund’s fees. Do they understand the annual fee charged by the target-date fund—often in addition to annual fees charged by the mutual funds in which the target-date fund invests?
Source: Investor Bulletin: Target-Date Retirement Funds, U.S. Department of Labor and U.S. Securities and Exchange Commission
DOL and SEC's Investor Bulletin on Target Date Funds, Sutherland Asbill & Brennan LLP, May 2010
SEC Proposes Rules to Disclose Risks in Target-Date Funds, SHRM Online Benefits Discipline, June 2010
Target-Date Funds Bounce Back in Retirement Plans, SHRM Online Benefits Discipline, March 2010
Many Misunderstand, Misuse Target-Date Funds, SHRM Online Benefits Discipline, December 2009
Participants Mostly Satisfied with Target-Date Funds, SHRM Online Benefits Discipline, October 2009
Target-Date Funds Receive Greater Scrutiny, SHRM Online Benefits Discipline, June 2009
Target-Date Funds: Four Key Considerations for Plan Sponsors, SHRM Online Benefits Discipline, April 2008
SHRM Online Benefits Discipline