ERISA-EBSA Issues A Proposed Rule That Requires More Disclosure Of Investments In Target Date Funds

According to a News Release dated November 29, 2010, and an accompanying Fact Sheet, the Employee Benefits Security Administration (the “EBSA”) has issued a proposed rule, which will enhance and provide more specific and comprehensive disclosure to participants concerning Target Date Funds (“TDFs”) held under 401(k) plans and other qualified defined contribution plans. The proposed rule would amend:

— the “qualified default investment alternative regulation” (29 CFR 2550.404c-5), which provides relief from certain fiduciary responsibilities for plan fiduciaries who, in the absence of directions from a participant, invest the participant’s account in a qualified default investment alternative, including a TDF; and
— the “participant-level disclosure regulation” (29 CFR 2550.404a-5), which requires plan administrators to furnish participants with certain investment-related information about each designated investment alternative under the plan, including any TDFs.

According to the Fact Sheet, TDFs are designed to make investment more convenient when saving for retirement, since they allocate investments among different asset classes, and change that allocation to become more conservative over time. However, TDFs are not managed according to uniform strategies. TDFs with the same target date can have very different investment strategies and asset allocations. Participants may not understand these differences, which can lead to very different levels of risk and investment results over time.

Further, according to the Fact Sheet, the proposed rule requires new disclosures about the design and operation of TDFs or similar investments, including:
• An explanation of how the asset allocation of the TDF will change over time, and when it will reach its most conservative position;
• An illustration of how the asset allocation of will change over time; and
• For a TDF that refers to a particular date (e.g., “Retirement 2050 Fund”), an explanation of that date’s relevance.
The proposed rule also requires a statement concerning the risk that a participant who invests his or her plan account in a TDF may lose money in that investment, even when he or she is close to retirement.

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