The proposed regulations were published in the Federal Register on November 30, 2010 (see “EBSA Unveils Target-Date Disclosure Proposal“).
While noting that ERIC “strongly supports the goal of making sufficient information available to participants to make informed investment decisions,” ERIC said that its letter contends that the desire to provide more information “must be balanced against the risk of information overload, as well as the cost and effort required to prepare more information than participants will or can utilize.”
ERIC President Mark Ugoretz cautioned that “Inundating participants with excessive information has serious consequences; too often it results in participants simply ignoring critical information that is overcome by excessive data.” The ERISA Industry Committee (ERIC) is a non-profit association that describes itself as “committed to representing the advancement of the employee retirement, health, and compensation plans of America’s largest employers.”
ERIC acknowledged that the measure of information provided to participants is particularly important in participant-directed plans “where the responsibility for balancing personal risks, and making adjustments as personal circumstances change, falls on the participant,” and that “No investment alternative (target date fund or otherwise) is designed to relieve a participant of this responsibility. Accordingly, it is critical that the disclosure requirements be calibrated to keep participants engaged.”
To get the proper measure, ERIC recommended that qualified default investment alternatives (QDIAs) and target-date funds (TDFs) not be singled out for disclosure of information that is also relevant for other investment alternatives. In fact, ERIC urged that, at a minimum, the required statements should recognize that “the risks associated with TDFs are comparable to the risks inherent in most other investments.”
In addition, ERIC contends that the final regulation should allow required disclosures for QDIAs and TDFs to be incorporated by reference to the same extent permitted by the final participant disclosure regulation, and should clarify that plans may combine QDIA notices with other required disclosures.
ERIC recommended that the final regulation should include model disclosures “in order to improve consistency, quality, and efficiency," and that a model QDIA notice “should expand on the existing model automatic enrollment notice by illustrating the level of detail that is appropriate, and should be drafted in a straightforward and replicable format, similar to the Model Comparative Chart included in the final participant disclosure regulation."
ERIC also recommended that the final regulation should clarify that the requirement to explain a TDF’s asset allocation can be satisfied by describing the design of the TDF, without getting into minute details regarding the underlying funds. “Although TDFs generally have designs and strategies that can be described succinctly, most fund managers retain the flexibility to adjust the underlying investments and asset mix at any time," the letter explains. ERIC contends that this flexibility is important because it enables fund managers to react efficiently to market events and changed circumstances, without the need for constant updates to the disclosure materials.
ERIC also suggests eliminating a requirement contained in the proposed regulations to explain assumptions about a participant’s contribution or withdrawal intentions. The letter contends that an explanation of assumptions about what a participant or beneficiary intends to do after the target date is not necessary and, according to ERIC, “incorrectly implies that knowledge or expectations about an individual’s future behavior are (or should be) considered in the design or selection of TDFs."
The regulation would still require a description of the underlying asset classes; the glidepath; the landing point; the risks; the age group for whom the TDF is designed; and the relevance of the target date. ERIC contends that this information should be sufficient to help participants understand the TDF alternative.
Among ERIC’s other recommendations are that the final regulation should:
- Not require disclosure of any information that is not also subject to disclosure under SEC rules, including existing SEC regulations and the advertising rules currently being developed.
- Include more detail on the proposed requirement to disclose historical performance data.
- Allow more incorporation by reference to a website to help reduce the cost of compliance.
- Not be effective before the later of 180 days after the final rule is published in the Federal Register, or the first plan year that starts on or after November 1, 2011.
ERIC’s comment letter is available at http://www.eric.org/forms/uploadFiles/2677100000010.filename.ERIC_TDF_QDIA_Proposed_Reg_Comment_011411.pdf