Senator Herb Kohl (D-WI), Chairman of the Senate Special Committee on Aging, has announced his intention to introduce legislation that would require target date mutual fund managers to take on fiduciary responsibility in order for their TDFs to be eligible to be Qualified Default Investment Alternatives (QDIAs).
The legislation will be introduced later this year, and appears to be the result of three factors:
- The first is that participants who invested in target date funds (TDFs) suffered substantial and unexpected losses in 2008. For example, participants who invested in 2010 funds--which were presumed to be conservatively invested--lost, on average, 25% in 2008. To the Senator, that was a staggering loss for a person within a year or two of retirement.
- Second, target date funds have been more widely accepted by retirement plans, and particularly 401(k) plans, than by individual investors. In other words, of all of the mutual funds, TDFs are the ones that most rely on money from 401(k) plans and other defined contribution plans. As a result, they have become an integral part of America’s retirement system and are, therefore, responsible for both the accumulation of wealth and the preservation of wealth.
- Third, there is a “conflict” within ERISA that both positively and adversely affects the managers of TDFs. On the one hand, managers of mutual funds have a special exemption in ERISA from the fiduciary responsibility rules. However, the managers of target date funds are, from a practical perspective, probably the most responsible for the quality of participant investing in 401(k) plans. Also, TDFs have been “anointed” as qualified default investment alternatives. In other words, target date funds, balanced- and risk-based funds, and managed accounts have received a special “seal of approval” from the government under the QDIA rules. As such, the Senator apparently believes that the managers of TDFs should be held to a higher standard of responsibility.
The Senator apparently believes that it is inappropriate for TDF managers to enrich themselves on participants’ money, while at the same time escaping ERISA’s standard of fiduciary responsibility.
It goes without saying that the mutual fund industry will fight this proposal, at least partially because of the burdens of being regulated by two entities—the SEC and the DOL. Because of that and other factors, we can anticipate a lively debate on the issue.