U.S. Senator Herb Kohl (D-Wisconsin), chairman of the Senate Special Committee on Aging, today announced his intent to introduce legislation that will require target-date fund managers to take on a fiduciary responsibility in order for such funds to be eligible for the designation of qualified default investment alternative (QDIA).
Reacting to a Bloomberg report that six of the nine largest U.S. target-date fund providers contain junk bonds in their 2010 portfolios (see “Some Target-Dates Visit the ‘Junk’ Shop“), Kohl said “the discovery that many 2010 target-date funds contain junk bonds is troubling, but not surprising. Many target-date funds are composed of hidden underlying funds that can have high fees, low performance, or excessive risk. With more than 90% of employers choosing off-the-shelf target date funds as their employee’s standard option, there is no question that we need greater regulation and transparency of these products.”
Kohl, whose committee convened one of the first hearings on the subject of target-date funds in February, recently chaired another hearing titled “Default Nation: Are Target-Date Funds Missing the Mark?” (see “Senate Committee Takes Aim at Target-Date Funds”). During that hearing, witness Michael Case Smith of Avatar Associates made the point that the firms that put together target-date fund allocations—which frequently include proprietary fund offerings—were not doing so as an ERISA fiduciary.
It was a case the firm also presented to the Labor Department recently for an advisory opinion, though the DoL said that the fact that a target-date or lifecycle mutual fund’s assets consist of shares of affiliated mutual funds “does not, on that basis alone, make the assets of the target-date or lifecycle mutual fund ‘plan assets’ of investing employee benefit plans or the investment advisers to such mutual funds fiduciaries to the investing plans under the Employee Retirement Income Security Act (ERISA)” (see “DoL: Advisers to Funds in Target-Dates not Fiduciaries”).
That result was noted by Kohl in his announcement: “Last week DOL released an advisory opinion stating that fiduciary responsibility of target-date funds currently resides with the employer. 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. Further, 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.”
Kohl went on to note that it is, however, “critical that the fiduciary responsibility rest with someone so that default investors are protected.” According to the announcement, Kohl’s forthcoming legislation will “improve the scrutiny of target-date funds by expanding the fiduciary responsibility of target-date fund managers.”
“As it stands, target-date products operate under less stringent fiduciary responsibility guidelines. The problem is that the people who are defaulted into target-date funds are the ones who need someone looking out for their financial interests the most,” Kohl said. “We need to ensure that automatic enrollees benefit from the same fiduciary protections as other investors.”