Congressional Chairs Ask the GAO to Review TDFs

Senator Patty Murray, D-Washington, chairwoman of the Senate Health, Education, Labor and Pensions (HELP) Committee, and House Representative Bobby Scott, D-Virginia, chairman of the House Education and Labor Committee, have sent a letter to the Government Accountability Office (GAO), requesting it conduct a review of target-date funds (TDFs).

They say that while TDFs are billed as offering participants retirement security by placing their assets in an age-appropriate glide path that grows more conservative as they approach retirement, the funds might actually be placing some participants at risk. Specifically, they say expenses and risk allocations vary considerably among funds.

“The millions of families who trust their financial futures to target-date funds need to know these programs are working as advertised and providing the retirement security promised,” Murray and Scott wrote in their letter. They noted that TDFs are often used as the qualified default investment alternative (QDIA) in a plan with automatic enrollment, and, as such, their assets have swelled to more than $1.5 trillion.

Their letter continued: “Retirement experts have raised concerns that the performance of TDFs and level of risk exposure can vary widely—even for those close to retirement.” They also say some TDFs may invest in alternative asset classes, including private equity, but little is known about these approaches.

Murray and Scott asked the GAO to look into 10 aspects of TDFs. First, they ask, what percentage of total defined contribution (DC) plan assets are invested in TDFs, as well as what percentage of participants are offered and participate in TDFs?

Second, for participants invested in TDFs who are approaching retirement, to what extent have they been affected by market fluctuations as a result of the COVID-19 pandemic—and how much variation is there in the performance of TDFs of the same vintage?

Third, do investors defaulted into TDFs reassess their investments, and, if so, how often?

Fourth, how does the asset allocation and fee structure vary across TDFs used as QDIAs? Along this line, they also ask, how do TDF fee structures compare with other investment products?

Fifth, how are TDFs marketed and advertised?

Sixth, what percentage of plan sponsors select off-the-shelf TDFs and what percentage turn to custom TDFs? Does one or the other deliver different performance?

Seventh, what kinds of alternative investments do TDFs invest in?

Eighth, has the Department of Labor (DOL) taken steps to help sponsors select appropriate TDFs for their plan and to help educate participants about these funds?

Ninth, when a plan does not have auto-enrollment but has a TDF in its investment lineup, what percentage of participants select the TDF?

Lastly, are there legislative or regulatory measures that could protect plan participants?