In opening the hearing of the U.S. Senate Special
Committee on Aging, titled "Default Nation: Are
Target-Date Funds Missing the Mark?", Chairman Herb
Kohl (D-Wisconsin) noted that this was the third hearing in
a series the committee had held on the subject of
strengthening the 401k system (see
Senate Hearing Asks, Are Target-Date Funds Missing the
Mark?
).
He also noted that target-date funds were "developed for
the average worker who may understand the importance of
saving, but may not appreciate the complexities of
investing."
However, regarding target-date funds, Senator Kohl said
"the more we learn, the more concerns we have."
Citing data that suggests that 96% of
Fidelity-administered plans that had implemented automatic
enrollment as of March 2009 had chosen target-date funds as
their default investment option, Kohl said that "a
conversation about target-date funds is really a
conversation about the future of America's retirement
security.
"Inappropriately High Level of
Risk"
He went on to note that the composition of target-date
funds "vary widely", and said that many contained "an
inappropriately high level of risk", noting that many
invested in 2010 series funds "lost as much as 41% of their
401(k) savings in 2008."
Kohl referenced the hearing the Committee held in
February (see
Senate Committee Takes Aim at Target-Dates
), and said that at that point discovered that there
was "no standard" on what was labeled as a
target-date fund, nor was their any regulation on their
composition.
He noted the Committee's call for regulators to look into
the matter, and referenced a joint hearing held by the
Department of Labor and Securities and Exchange Commission
in June in response (see
EBSA/SEC to Hold Target-Date Fund Hearing
), saying he was "Hopeful that we'll see more
oversight of this product", which he said was "on track to
become the #1 savings vehicle in America."
Key Problems
That said, Kohl said there were three "key problems"
with target-date funds that the Committee was focused on; a
lack of transparency in design, that many funds charged
"excessive fees" that eroded the value of assets over time,
and that "fund managers have a conflict of interest in
constructing target-date funds and must resist the
temptation to put their interests above those of the
participants."
Kohl noted that the Committee had previously addressed
the issues of hidden fees in 401k plans that can have a big
impact on 401(k) balances, and that he had introduced
legislation with Senator Harkin (D-Iowa) to require
disclosure of 401k fees.
He also said that the Committee had examined the long-term
effect of 401lk loans and withdrawals - and that he would
soon introduce a bill to implement GAO's recommendations to
reduce the effects of those activities.
"For after all," he said, "in our efforts to
encourage Americans to save for retirement, we must also
make sure that they are also able to save smartly."