Senate Hearing Asks, Are Target-Date Funds Missing the Mark?

Nevin E. Adams, JD

October 26, 2009 — This week a Senate committee will once again take up the topic of target-date funds. —

U.S. Senator Herb Kohl (D-Wisconsin), chairman of the Senate Special Committee on Aging, today released a report by the U.S. Government Accountability Office (GAO) examining the effect automatic enrollment has on 401(k) participation and retirement savings (see GAO Says Automatic IRA no Silver Bullet), and also announced panelists for a hearing titled, “Default Nation: Are 401(k) Target Date Funds Missing the Mark?”

In announcing the report, Kohl noted that the GAO found that automatic enrollment policies, which were instituted as part of the Pension Protection Act of 2006, appear to increase participation in 401(k) plans significantly, though they may not be suitable for all plan sponsors, such as those with a high rate of workforce turnover. He said that the report also considered the benefits and limitations of proposals to institute automatic IRAs and other state-sponsored retirement savings accounts for Americans who lack access to an employer-sponsored plan, and that GAO raised questions about how such a proposal could be implemented to effectively help low-income workers, who are most likely to need assistance in saving for a secure retirement.

“Just like target date funds, the auto-IRA is a very promising concept that could help millions of Americans save for retirement. But with both of these products, the devil is in the details, and we need to make sure that they are implemented correctly,” said Kohl, in a press release.

The GAO report also made mention of the widespread adoption of target date funds as the default investment for plans with automatic enrollment.

On October 28 Senator Kohl plans to hold an Aging Committee hearing on strengthening the 401(k) system, “with a particular focus on the proliferation, composition, and regulation of target date funds.” According to the announcement, the hearing expands the probe into target date funds first undertaken by the Aging Committee as part of its February hearing (see Senate Committee Takes Aim at Target-Date Funds).

Scheduled to testify at the hearing are:

* Barbara Bovbjerg, Director of Education, Workforce and Income Security, U.S. Government Accountability Office
* Andrew Donahue, Director of Investment Management, United States Securities and Exchange Commission
* Phyllis C. Borzi, Assistant Secretary of Labor, Employee Benefits Security Administration, U.S. Department of Labor
* John Rekenthaler, CFA, Vice President of Research, Morningstar
* Ralph Derbyshire, General Counsel, Personal and Workplace Investing, Fidelity
* Michael Case Smith, Senior Vice President, Institutional Strategies, Avatar Associates