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Highlights

To promote the adoption of appropriate default investments by retirement plans that automatically enroll workers, in 2007 the Department of Labor (DOL) identified three qualified default investment alternatives. One of these options--target date funds (TDF)--has emerged as by far the most popular default investment. TDFs are designed to provide an age-appropriate asset allocation for plan participants over time. Because of recent concerns about significant losses in and differences in the performance of some TDFs, GAO was asked address the following questions: (1) To what extent do the investment compositions of TDFs vary; (2) what is known about the performance of TDFs; (3) how do plan sponsors select and monitor TDFs that are chosen as the plan's default investment, and what steps do they take to communicate information on these funds to their participants; and (4) what steps have DOL and the Securities and Exchange Commission (SEC) taken to ensure that plan sponsors appropriately select and use TDFs? To answer these questions, GAO reviewed available reports and data, and interviewed TDF managers, plan sponsors, relevant federal officials, and others.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Labor The Secretary of Labor should direct the Assistant Secretary of the Employee Benefits Security Administration to amend the qualified default investment alternatives (QDIA) regulations so that fiduciaries are required to document that they have considered, to the extent possible, whether other characteristics of plan participants, in addition to age or target retirement date, are relevant factors in choosing a QDIA.
Closed - Implemented
The Department of Labor has published a document for plan fiduciaries that contains tips for the evaluation and selection of target date funds. This document incorporates the spirit of our recommendation, and includes key text that is almost exactly parallel to text in our report conclusions.
Department of Labor The Secretary of Labor should direct the Assistant Secretary of the Employee Benefits Security Administration to provide guidance to plan sponsors regarding the limitations of existing TDF benchmarks and the importance of considering the long-term TDF investment allocations and assumptions used in developing the TDF asset allocation strategy.
Closed - Implemented
In February 2013, the agency published a document for plan fiduciaries - "Target Date Retirement Funds: Tips for ERISA Plan Fiduciaries" - that contains tips for the evaluation and selection of target date funds (TDF). In this guidance, the agency highlighted the importance of understanding how a TDF's asset allocation changes over time. The agency specified, for example, that some TDFs carry higher risk near the retirement date, and assume that a participant will not cash out at retirement. Other TDFs, the agency noted, are more conservative near the retirement date, assuming that participants will cash out upon retirement. Failure to understand these differences may result in unpleasant surprises, the agency noted. The document reflects the agency's measured consideration of the factors that plan fiduciaries should consider when selecting and retaining TDFs.
Department of Labor The Secretary of Labor should direct the Assistant Secretary of the Employee Benefits Security Administration to, in its final regulation on target date disclosure, expand the requirement that plan sponsors provide information regarding key assumptions concerning contribution and withdrawal rates by requiring that participants receive a statement regarding the potential consequences of saving, withdrawing, or otherwise managing TDF assets in a way that differs from the assumptions on which the TDF is based.
Closed - Not Implemented
Employee Benefits Security Administration (EBSA) reported that, as a result of an effort by the SEC to test investor understanding of target date funds (TDF) and TDF advertisements, it published a Federal register notice in June 2014 soliciting input on the implications of SEC's research on Labor's target date fund rule. EBSA stated that in light of the need to coordinate with SEC and the uncertainty regarding the timing and substance of SEC's actions, Labor cannot identify a completion date at this time. However, EBSA indicated that it would consider GAO's recommendation in preparing final amendments to the QDIA and participant-level disclosure regulations. In FY15, the agency reported that it decided to move this project into the "long-term" action category on its Semiannual Regulatory Agenda. This decision was taken due to the uncertain timetable for SEC action on its rule and to reflect the agency's current regulatory and guidance priorities. This decision will be revisited during the next regulatory cycle, taking into account agency priorities and resources and the status of the SEC initiative.

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