Skip to main content

401(k) Retirement Plans: Department of Labor Should Update Guidance on Target Date Funds

GAO-24-105364 Published: Mar 28, 2024. Publicly Released: Apr 29, 2024.
Jump To:

Fast Facts

Target date funds are a 401(k) option that allocate assets based on when participants plan to retire. These funds put more in higher risk investments when participants are younger and shift to lower risk investments as they approach retirement.

We found that funds closer to the target date varied more in investment performance and risk compared to funds further from the target date.

The Department of Labor developed guidance on these funds over a decade ago. We recommended updating the guidance with more recent information to help plan sponsors and participants better understand fund disclosures and risks.

A close up of a document that includes a pie chart showing investments and savings in retirement. Next to that is a calculator.

Skip to Highlights

Highlights

What GAO Found

Target date funds (TDFs) are widely offered and have become the most popular investment option used by 401(k) plan participants. TDFs allocate assets over time based on participants' targeted retirement dates. The Pension Protection Act of 2006 facilitated plan sponsors' automatic enrollment of employees into their plans using default investments, including TDFs. Plan sponsors GAO spoke with said they choose TDFs as their default investment because TDFs offer low fees, a well-diversified all-in-one portfolio, and a “set it and forget it” option for participants. A nationwide study showed that the share of participants offered TDFs increased from 42 percent in 2006 to 84 percent in 2020. According to other studies, auto-enrollment contributed to a majority of participants investing solely or primarily in TDFs, which represent more than a quarter of 401(k) assets.

Variation in TDF design affects their performance and risk. Asset managers design TDFs' investment mixes to shift from higher risk assets (e.g., stocks) to lower risk assets (e.g., fixed income) over time, based on participants' targeted retirement dates. These mixes varied more within 10 years of the target date, according to GAO's analysis of Morningstar Direct data.

In addition, as COVID-19 disrupted financial markets in March 2020, TDFs that were further from their target dates lost a larger share of their value than TDFs closer to their target dates because they were more heavily invested in higher risk assets. For instance, an average TDF with a 2060 target date lost 14 percent of its value from February to March 2020, whereas the average TDF with a 2020 target date lost 8 percent of its value. While TDFs closer to their target dates experienced smaller losses in March 2020 than those further from their target dates, their performance varied more. This was due to more variation in their investment mixes. Negative returns are significant for participants close to, or in, retirement because they have less time to recover from them than those who are further from retirement.

The Department of Labor (DOL), the Office of the Comptroller of the Currency (OCC), and the Securities and Exchange Commission (SEC) oversee TDFs through disclosure requirements, enforcement, and examinations. But DOL's guidance has not been updated and lacks detail. For example, DOL developed guidance in 2010 for participants and in 2013 for plan sponsors to help them select TDFs. However, the guidance does not include recent developments such as the increase of TDFs structured as collective investment trusts. Collective investment trusts are bank-administered pooled funds established exclusively for qualified plans such as 401(k)s. The responsible bank acts as the fiduciary and holds legal title to the assets. Without updated guidance, plan sponsors and participants may experience challenges identifying and understanding disclosures for collective investment trust TDFs.

Why GAO Did This Study

Millions of Americans depend on TDF investment options offered by their 401(k) plans for financial security in retirement. According to Morningstar, a financial services firm, and the Investment Company Institute, an association that represents regulated investment funds, there was about $2.8 trillion in TDF assets held in defined contribution plans as of June 2023. As the stock market dropped precipitously at the start of COVID-19, retirement experts and members of Congress raised questions about variation in the performance and risk exposure in TDFs, particularly those held by participants close to retirement.

GAO was asked to examine TDFs' performance and risk. This report examines the extent to which 401(k) plans and participants use TDFs; how asset allocations, risk, performance, and fees vary across TDFs; and how DOL, OCC, and SEC oversee TDFs, among other topics.

GAO analyzed Morningstar Direct data, including all TDFs structured as mutual funds that were active from 2017 to 2021, the most recent available data at the time of the request. GAO also reviewed retirement industry documents; and interviewed industry representatives and officials from DOL, OCC, and SEC.

Recommendations

GAO is recommending that DOL update (1) its 2013 guidance for plan sponsors and (2) its 2010 guidance for plan participants on selecting TDFs. DOL disagreed with both recommendations. GAO continues to believe both are warranted, as discussed in the report.

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Labor The Secretary of Labor should ensure that the Assistant Secretary of the Employee Benefits Security Administration updates the 2013 guidance for plan sponsors, "Target Date Retirement Funds—Tips for ERISA Plan Fiduciaries," to provide information that reflects recent TDF developments. This should include the use of collective investment trusts and differences between "to" and "through" TDF glide paths. (Recommendation 1)
Open
DOL officials disagreed with this recommendation, stating that they believe the guidance document is balanced and provides basic information that plan fiduciaries can use to improve retirement outcomes, regardless of whether the TDF is structured as a mutual fund or collective investment trust. Our recommendation is also aimed at improving retirement outcomes and we believe that providing updated information on fundamental features of TDFs, which are the most widely used investment option in 401(k) plans, would help DOL meet this goal. For example, DOL could add targeted references to collective investment trust disclosures and include links to OCC resources to complement the specific references to mutual funds and mutual fund disclosures and help ensure that plan fiduciaries understand the applicable disclosures to inform their TDF selection and monitoring process. DOL officials also stated that this guidance notes the issue of investment risk when discussing the significance of differences between "to" and "through" TDF glide paths based on substantial evidence that many plan sponsors and participants had not understood the extent to which TDFs were exposed to this risk, including during market turbulence in 2008. While we understand DOL's focus on investment risk at the time it published this guidance document, we believe that a targeted update to add inflation risk to the discussion of the differences of "to" and "through" TDF glide paths would help plan sponsors improve retirement outcomes for their participants.
Department of Labor The Secretary of Labor should ensure that the Assistant Secretary of the Employee Benefits Security Administration, in consultation with the SEC and OCC as appropriate, updates the 2010 guidance for plan participants, "Investor Bulletin: Target Date Retirement Funds," to provide information that reflects recent TDF developments. This should include the use of collective investment trusts. (Recommendation 2)
Open
DOL officials disagreed with this recommendation, stating that they believe the guidance document is balanced and provides basic information that plan participants can use to improve their retirement outcomes, regardless of whether the TDF is structured as a mutual fund or collective investment trust. Our recommendation is also aimed at improving retirement outcomes, and we believe that providing updated information on fundamental features of TDFs, which are the most widely used investment option in 401(k) plans, would help DOL meet this goal. For example, DOL could add targeted references to collective investment trust disclosures and include links to OCC resources to complement the specific references to mutual funds and mutual fund disclosures and help ensure that participants are able to identify and understand disclosures for collective investment trust TDFs in which their retirement savings are invested, particularly since even seemingly small fees can significantly reduce 401(k) plan retirement savings.

Full Report

GAO Contacts

Topics

401(k) plansCompliance oversightConsultantsCurrency and coinageDatabase management systemsDefined contribution plansFederal agenciesFinancial instrumentsInvestment portfolioMutual fundsPrice inflationRetirement plansThrift savings plan