Senators Tom Harkin (D-IA), Michael Enzi (R-WY) and Herb Kohl (D-WI) have written to Chair Mary Schapiro to recommend that the SEC broaden its proposed amendments relating to target date funds to include non-mutual funds and to require additional disclosures in the marketing materials. Harkin is chair of the Health, Education, Labor and Pensions Committee on which Enzi serves as ranking member. Kohl is chair of the Committee on Aging. The senators also urged the Commission to remind plan fiduciaries of their duty to prudently select and monitor target date funds offered to participants in defined contribution pension plans.

The senators believe that target date funds are a useful investment vehicle for defined contribution plans. A recent Department of Labor study found that about 70% of employers now use target date funds as their default investments. The recent economic downturn made clear that not all target date funds are created equal, according to the senators. Some funds charge excessive fees, lack adequate transparency and have conflicts of interest.

The senators said they are pleased that the SEC has proposed a rule to address concerns that the advertising of target date funds could be misleading or confusing to investors. They pointed to a diversity of views in the investment community with respect to how these funds should be invested at the target date. Some funds reach a conservative, static investment allocation on the target date, they observed, while others do not become static until many years after the retirement date.

The senators expressed concern about the limited scope of the SEC’s proposal since not all target date funds are mutual funds. They pointed out that a growing number of defined contribution plan fiduciaries are electing to use custom target date funds or funds that may be exempt from the Investment Company Act such as bank-maintained collective investment trusts or insurance company separate accounts. In the senators' view, the SEC should expand the application of its proposal, to the extent that it has the authority to do so, to all target date funds offered to defined contribution plans.

If the SEC lacks jurisdiction, the senators urged the agency to work closely with the DOL since it has broad authority to regulate the use of pension plan assets and the services provided to plans.

The senators also raised concerns that the disclosure about a fund’s glide path alone is insufficient in helping investors determine if the investment is right for them. The senators outlined a number of additional disclosures they believe should be required in the marketing materials, including the age for which a fund was designed, the relevance of the date in the fund’s name and the fund’s assumptions about the investors’ withdrawal intentions after reaching the target date.

The senators support the proposed use of graphs to help plan participants understand the investment composition of various target date funds, but believe the graphs should also provide information about the investment composition at the starting date, the target date and the final allocation in retirement.

The senators encouraged the SEC and DOL to continue with their campaigns to educate plan fiduciaries about their duties when selecting target date funds under the Employee Retirement Income Security Act. Fiduciaries must continue to monitor and reevaluate the management, the investment strategy, the fees and other factors, they advised. The senators also urged the agencies to provide additional guidance for retirement plan fiduciaries and for small businesses that sponsor defined contribution plans with target date funds.

The senators also suggested that the SEC and DOL study the management and composition of target date funds to determine whether certain asset allocation models or glide paths are inappropriate and should be prohibited as default investments in defined contribution plans.