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Target Date Funds Under Government Review

401k Plan AutoTarget date funds (TDFs) have begun to undergo increased scrutiny as of late.  There are questions about the risks TDFs bring to retirement outcomes.  Now, the government appears to be looking at TDFs through a regulatory lens.  The Government Accountability Office (GAO) has been asked to review TDFs.

Target date funds were once considered the “set it and forget it” panacea of qualified default investment alternatives (QDIAs) for retirement plans.  Basically, when an employee was automatically enrolled into the plan, they would be defaulted into a TDF that was appropriate – for both the participant’s age and stage of life.  However, expenses and asset allocations differ among funds.  Therein lies the concern.

Currently, $1.5 trillion in retirement savings is invested in Target Date Funds.  In addition, more than three-quarters of retirement plans, covering three-quarters of participants, include target date funds in their investment lineup.  This, according to a recent article published in ThinkAdvisor.  That equates to a lot of retirement money being invested in Target Date Funds.  Some of which may not deliver the diversification and reasonableness of fees advertised.  Another concern is the use of alternative investments in TDFs.  The use of these alternative assets, such as hedge funds or private equity, has raised questions.  These questions concern the level of risk and how they impact participants’ returns and expenses.

The House Committee on Education and Labor and the Senate Committee on Health, Education, Labor and Pensions, also known as the HELP Committee, have asked the GAO to look into Target Date Funds.  The interest is in helping to gain a better understanding of their inherent risks and fees and how they differ across various fund offerings.  The GAO is also being tasked with reviewing Target Date Funds’ alternative investment holdings.  The GAO desires to gain insights into the extent to which TDFs offer these types of investments.  And also, what information is available to plan sponsors and participants about the risks and benefits of TDFs’ asset allocations.  Finally, lawmakers are interested in discerning how participants who are approaching retirement age and who are invested in TDFs have been impacted by market volatility, particularly related to the Covid-19 pandemic.

These reviews are still in early days.  Plan sponsors and retirement plan committees should keep an eye on the GAO for findings.  There may be further guidance regarding the use of target date funds.  Retirement plan fiduciaries who are considering alternatives to TDFs as a QDIA may find value in this article on managed accounts.

Steff Chalk

Steff Chalk

Managing Editor at 401kTV
Steff C. Chalk is Executive Director of The Retirement Advisor University, a collaboration with UCLA Anderson School of Management Executive Education. Steff also serves as Executive Director of The Plan Sponsor University and is current faculty of The Retirement Adviser University.
Steff Chalk
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