Target-Date Funds Have a Target on Them | Chief Investment Officer

Two powerful congressional committee chiefs, Sen. Patty Murray, D-Washington, and Rep. Bobby Scott, D-Virginia, are calling on the Government Accountability Office (GAO) to review target-date funds (TDFs) over concerns that risk allocations, expenses, and other aspects of the investment vehicles could be putting retirees’ savings at risk.

Murray, who is the chairwoman of the Senate Health, Education, Labor, and Pensions (HELP) Committee, and Scott, chairman of the House Education and Labor Committee, sent a letter to the GAO officially requesting a review of TDFs. The funds are intended to balance risk and provide an age-appropriate asset allocation for plan participants over time. The legislators noted that the funds are often the default investment option for employer-based retirement plans and that more than $1.5 trillion is invested in TDFs.

“TDFs are often billed as ‘set it and forget it’ investments, yet expenses and risk allocations vary considerably among funds,” Murray and Scott wrote in a letter to Comptroller General of the United States Gene Dodaro, who heads the GAO. “The millions of families who trust their financial futures to target-date funds need to know these programs are working as advertised.”

The letter said retirement experts have raised concerns about the funds’ inconsistency, as their performance level of risk exposure can vary widely, even for those who are approaching retirement age. It cited a New York Times article that said many of the major TDFs tailored for people retiring in 2020 had a high allocation to stock funds—approximately 50% to 55%. Typically, investors approaching retirement age are advised to reduce their equity holdings and increase their holdings in more conservative investments such as fixed income.

“While TDFs have traditionally included a mix of equities and fixed-income investments, the Department of Labor [DOL] under the Trump administration paved the way for the use of potentially higher risk and more lightly regulated ‘alternative’ assets, such as private equity,” said the letter. “Little is known about the extent to which TDFs offered in employer-provided retirement plans include alternative assets and how those TDFs with alternative assets impact participants’ fees and returns.”

The lawmakers said they wanted the GAO to address the following questions:

What percentage of total defined contribution (DC) plan assets are invested in TDFs, and what percentage of plan participants are offered, and participate in, TDFs? What percentage of plan participants are defaulted into TDFs?
To what extent have TDF participants approaching retirement age been affected by market fluctuations as a result of the COVID-19 pandemic? How much variation is there in the performance of TDFs of the same vintages at or near the target retirement date? To what extent have TDF providers taken steps to mitigate the funds’ volatility?
How often do investors with default investment TDFs in DC plans reassess their investments, and what is the cost of a passive investment stance in a volatile market? Are TDFs properly structured to withstand major stock fluctuations?
How does the asset allocation and fee structure vary among TDFs used as default options in 401(k) plans? How do TDF fee structures compare with other investment products? To what extent do TDFs shift the allocation to more conservative investments to protect participants from losses as they near retirement?
How are TDFs marketed and advertised? Are participants sufficiently made aware of the cost and asset allocation variation among TDFs?
What percentage of plan sponsors select off-the-shelf TDFs, and what percentage of plan sponsors select custom ones? Is there a material difference in the performance between the two?
To what extent do TDFs include alternative assets, such as hedge funds or private equity? What information is available to participants and plan sponsors about the risks and benefits of asset allocations in TDFs? How do plan sponsors select and oversee TDFs to ensure they have a suitable risk level?
What steps has the DOL taken to ensure that plan sponsors appropriately select and use TDFs, and that sponsors provide appropriate information and education to participants?
When provided the option to invest in TDFs, how often do plan participants rely primarily, or exclusively, on TDFs? How many TDFs do plan sponsors offer in their investment options?
What are possible legislative or regulatory options that would bolster the protection of plan participants, who are nearing retirement or are retired, and meet the intended goals of TDFs?