By Mark Huffman
ConsumerAffairs.com
February 26, 2009
The Senate Special Committee on Aging is looking into 401(k) target-date funds, with some members calling for new protections for account holders.
At a hearing Wednesday, witnesses offered insight into the myriad factors that are affecting the ability of baby boomers to retire, including the weakened performance of 401(k) funds, the instability of housing values, and the challenges of the labor market for older workers, all of which are contributing to diminished prospects for a secure retirement.
The panel took a particularly close look at 401(k) target-date funds, which are designed to gradually shift to more conservative investments as workers approach retirement. Committee Chairman Herb Kohl (D-WI) also unveiled findings from a Committee investigation of 401(k) funds designed for people planning to retire in 2010, which revealed a wide variety of objectives, portfolio composition and risk within same-year target-date funds.
They heard about the dangers excessive risk can pose for those on the brink of retirement: one 2010 target-date fund lost 41 percent in 2008. In conjunction with the hearing, Kohl sent letters to U.S. Secretary of Labor Hilda Solis and U.S. Securities and Exchange Commission Chairwoman Mary Schapiro, urging them to immediately begin a review of target date funds and begin work on regulations to protect plan participants.
Despite their growing popularity, there are absolutely no regulations regarding the composition of target date funds, said Kohl. With more and more Americans relying on 401(k)s and other defined contribution plans as their primary source for retirement savings, we need to make sure their savings are well-protected with strong oversight and regulation.
Target-date funds are designed to simplify long-term investing by automatically adjusting to more conservative investments as the fund approaches a set date. By authority of the Pension Protection Act of 2006, the U.S. Department of Labor has issued regulations allowing target-date funds to be used as a qualified default investment alternative in employer-sponsored retirement plans.
However, under the Employee Retirement Income Security Act and DOL guidelines, there are no requirements regarding the composition of target date funds and the appropriate ratio of stocks and bonds as the fund nears its target.
As a result of the decision to allow target-date funds to be used as QDIAs, they are increasingly used as the primary investment option for millions of Americans. Target date funds only made up roughly three percent of defined contribution savings in 2006, but are expected to increase to 20 percent in 2010. By 2015, it is expected that more than one-third of all defined contribution savings will be in target date funds.
A recent study found that more than half of affluent 60-year-olds are revamping their retirement plans.
