Congressional Leadership Seeks Additional Information on Target Date Funds

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.