Since their introduction in the 1990s, target date funds have grown  to comprise the majority of assets in most qualified defined contribution plans. However, recent questions from Congressional leadership  suggest that there are potential concerns with how these funds are  operated, particularly in light of guidance from the Trump administration and the impact of COVID 19 on the markets. These questions,  in turn, give plan fiduciaries additional factors to assess in reviewing  target date funds.

Congressional Request for Information

In May, Senator Patty Murray (Chair of the Senate Committee on  Health, Education, Labor & Pensions) and Representative Robert  Scott (Chairman of the House Committee on Education & Labor)  asked the Government Accountability Office ("GAO") to conduct a  review of target date funds. Their letter reflected several concerns.  Notably:

  • The expense and risk allocation of target date funds vary significantly among target date funds on the market, even when participants are close to retirement, and are sometimes significantly higher than available benchmarks (such as the target  date funds offered under the Thrift Savings Plan).
  • Participants may not be encouraged to review target date funds because of the ways in which they are marketed.
  • The Trump administration introduced the possibility for higher risk alternative investments in target date funds and there is  very little data on the utilization of such alternative investments.
  • The questions suggested in the letter to the GAO suggest a few different concerns regarding target date funds on the part  of Congressional leadership, specifically with respect to the  impact of the pandemic on target date funds, utilization of  the funds and alternative investments in them, how investors  reassess the funds and their glide paths, fund marketing, and  off the shelf versus custom target date funds.

Potential Questions for Plan Fiduciaries

Although the GAO has not formally addressed Senator Murray and  Representative Scott's letter yet, the letter provides some insight on  potential factors plaintiffs' attorneys might look at in the future and  additional due diligence that plan fiduciaries can perform. Specifically,  plan fiduciaries might consider asking:

  • How their target date funds performed during the pandemic, especially with respect to funds for participants close to retirement;
  • How the expenses of the target date funds compared to other hypothetical portfolios that could be constructed using the  plan's menu; and
  • Whether it would be appropriate to develop communications to participants educating them on the plan's target date fund and  reassessing their investment time horizon.

It is unclear at this point whether the GAO will engage in a more formal  inquiry regarding target date funds. However, Senator Murray and  Representative Scott's letter provides some useful insight regarding  potential avenues of inquiry regarding target date funds in addition to  those discussed in the Department of Labor's prior guidance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.