Alert June 25, 2009

SEC and DOL Hold Joint Hearing on Target Date Funds

Target Date Funds

The Securities and Exchange Commission (“SEC”) and the Department of Labor (“DOL”) held a joint hearing on June 18, 2009 in which they received testimony relating to target date funds. The hearing served as a forum for industry professionals to educate the SEC and DOL about the nature and design of target date funds and to opine as to whether regulatory action is necessary to help ensure that target date funds align with long-term financial expectations. 

Target date funds are investment funds that automatically rebalance their asset allocations as the investor’s “target date” approaches. The fund’s manager selects an allocation plan, typically called a “glide path,” which is designed to become increasingly conservative, often reflected by an increased focus on cash and fixed-income investments as opposed to equity investments, as the fund approaches the target date. Target date funds have become increasingly utilized investment alternatives for retirement plans over the past several years, with plan participants choosing funds that have a target date corresponding with the participant’s expected retirement. In particular, these funds have become significantly more popular since the DOL issued regulations under the Pension Protection Act of 2006 (“PPA”) allowing target date funds that satisfy certain requirements to serve as Qualified Default Investment Alternatives (“QDIAs”), with target date fund assets increasing from $66 billion at the end of 2005 to $152 billion in March, 2009.1 QDIA rules provide retirement plan fiduciaries with some relief from liability under the fiduciary duty provisions of ERISA if a participant’s retirement plan account is invested in a QDIA as a default investment, even without an affirmative election by the participant.

Increased Regulatory Scrutiny

Target date funds have recently come under increased regulatory scrutiny. In particular, concerns have been raised regarding the use of target date funds in various types of accounts and recent declines in average target date fund performance. Average losses in 2008 for 31 target date funds with a target date of 2010 were around 25%, with returns ranging from negative 3.6% to negative 41%. In a speech last month before the Mutual Fund Director’s Forum, SEC Chairman Mary Schapiro told the audience that the SEC will be considering “whether additional measures are needed to better align target date funds’ glide paths and asset allocations with investor expectations.” She also noted that the SEC will be reviewing “whether the use of a particular target date in a fund’s name may be misleading or confusing to investors and whether there are additional controls the SEC should impose to govern the use of a target date in a fund’s name.”2

Potential Regulatory Initiatives Discussed at the Hearing  

The following potential regulatory initiatives were discussed at the June 18 hearing: (i) enhanced disclosure; (ii) mandated asset allocation; (iii) fund name requirements; and (iv) review of QDIAs. Neither the SEC nor the DOL provided any indication at the hearing as to its position on adopting any or all of these suggestions.

Enhanced Disclosure. According to the Investment Company Institute (“ICI”), many in the industry concede a gap exists in the general public understanding of target funds. The ICI proposed that a fund should: (i) explain that the target date used in a fund name represents the actual year when an investor is assumed to retire and stop making new investments to the funds; (ii) explain whether it is designed for an investor who expects to spend all or most of his or her money at retirement, or is designed for an investor who plans to withdraw money gradually over a long period; (iii) clearly disclose the age group for whom the fund is designed; (iv) provide investors with an illustration of the glide path that the target date fund follows to become more conservative over time; and (v) be accompanied by a statement that the risks associated with a target date fund include the risk of loss near, at or after the target date, and that there is no guarantee that the fund will provide adequate income at and through the investor’s retirement.3 

Mandated Asset Allocation. At the June 18 hearing, regulators and presenters discussed the potential for large variation in the percentage of equity holdings among different funds with the same target date, which in turn can expose investors’ retirement savings to very different risks that they might not anticipate based on the stated target dates. There was discussion during the hearing about the possibility of future regulation of target date funds being aimed at mandating specific asset-composition requirements. As an alternative to mandated asset allocation, witnesses suggested potential innovations to target date funds, including (i) offering risk profile choices to retirement plan sponsors and investors considering such funds, (ii) incorporating investment vehicles that would provide minimum distributions upon an investor’s retirement and (iii) greater diversification of asset classes.

Fund Name Requirements. The target date in a fund’s name typically refers to an investor’s expected retirement date. That is the date an investor is assumed to stop making contributions to the fund – a key event that is taken into account in the design of all target date funds. As noted in the ICI’s recommendations, some of the investor confusion about target date funds seems to be centered around whether the use of a particular target date in the fund’s name is misleading or confusing. This is due in large part to the disparity in investment allocations at the stated target date among different target date funds with the same target date. Although specific suggestions for name modifications were not discussed at the hearing, industry testimony urged the SEC and DOL not to create any labels to identify funds as “conservative,” “moderate” or “aggressive.” 

Review of QDIAs. Numerous panelists noted that the public policy behind QDIAs is sound, and industry sentiment expressed at the hearing appeared to support target date funds as being well-suited as QDIAs. However, one panelist suggested that unless changes to the names of target date funds were implemented, in their current incarnation, it may not be appropriate to continue allowing them protection under QDIA.


During the hearing on target date funds, neither SEC nor DOL representatives indicated their intentions with respect to adopting or modifying regulations relating to target date funds. Witnesses generally applauded target date funds as a means of ensuring that investors consistently maintain both equity and fixed income investments in their retirement portfolios, while recognizing that 2008 was an unusually volatile year resulting in investment losses across all asset classes. The SEC and DOL did not announce their next steps, if any, with respect to target date funds.