The agency also recommends the DoL do more to ensure that plan participants have access to essential information about target-date funds.
In its report, the GAO noted that the DoL and Securities and Exchange Commission (SEC) have taken important steps to improve TDF disclosures, participant education, and guidance for plan sponsors and participants. Both agencies have proposed regulations aimed at helping to ensure that investors and participants are aware of the possibility of investment losses and have clear information about TDF asset allocations.
However, GAO said it found that the DoL could take additional steps to better promote more careful and thorough plan sponsor selection of TDFs as default investments, and help plan participants understand the relevance of TDF assumptions about contributions and withdrawals.
The agency found that while some plan sponsors conduct robust TDF selection and monitoring processes, other plan sponsors face challenges in doing so. Plan sponsors and industry experts identified several key considerations in selecting and monitoring TDFs, such as the demographics of participants and the expertise of the plan sponsor.
Some plan sponsors may face several challenges in evaluating TDFs, such as having limited resources to conduct a thorough selection process, or lacking a benchmark to meaningfully measure performance. Although plan sponsors may use various media in an effort to inform participants about funds offered through the plan, some plan sponsors and others noted that participants typically understand little about TDFs.
The GAO performed its study because target-date funds vary considerably in asset structures and in other ways, largely as a result of the different objectives and investment philosophies of fund managers. In the years approaching the retirement date, for example, some TDFs have a relatively low equity allocation so that plan participants will be insulated from excessive losses near retirement, while other TDFs have an equity allocation of 60% or more in the belief that relatively high equity returns will help ensure that retirees do not deplete savings in old age.
TDFs also vary considerably in other respects, such as in the use of alternative assets and complex investment techniques. In addition, allocations are based in part on assumptions about plan participant actions—such as contribution rates and how plan participants will manage 401(k) assets upon retirement—which may differ from the actions of many participants.
“These investment differences and differences between assumed and actual participant behavior may have significant implications for the retirement security of plan participants invested in TDFs,” the agency said.The GAO report is at http://www.gao.gov/new.items/d11118.pdf.