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Aging Committee Releases Report on Target Date Fund Investigation

WASHINGTON, D.C. - Today U.S. Senator Herb Kohl (D-WI), chairman of the Senate Special Committee on Aging, held a hearing on strengthening the 401(k) system, with a particular focus on the proliferation, composition, and regulation of target date funds. Target date funds, sometimes called lifecycle funds, are a type of mutual fund that automatically rebalances to a more conservative asset allocation as the participant approaches their target retirement date. Witnesses at today's hearing explored issues considered detrimental to the effectiveness of target date funds, including lack of disclosure to plan participants and sponsors, excessive hidden fees, conflicts of interest and lack of fiduciary responsibility on behalf of plan managers, and the need for additional enforcement and oversight efforts by the related agencies. The Committee released a report highlighting these concerns, many of which were unearthed during its ongoing investigation into the funds.
"As the Aging Committee has continued with our investigation of target date funds, it seems the more we learn, the more concerns we have. We need to make sure that in our efforts to encourage Americans to save for retirement, they are able to save smartly," said Kohl.
Since the U.S. Department of Labor (DOL) designated target date funds as an appropriate default investment option in 401(k) plans, they have experienced an explosive growth in popularity and are on track to be the number one investment vehicle in America. The losses suffered by target date funds during the economic downturn raised concerns about the design and transparency of these funds. Today's hearing expanded the probe into target date funds first undertaken by the Aging Committee as part of its February hearing, at which preliminary findings were released.
First to testify was Barbara Bovbjerg from GAO, who provided an overview of the current pension landscape, detailing the shift toward automatic enrollment and the growing popularity of target date funds. Next, Andrew Donohue, Director of Investment Management for the United States Securities and Exchange Commission (SEC), and Assistant Secretary of Labor Phyllis Borzi, from DOL's Employee Benefits Security Administration, updated the Committee on steps taken since the joint SEC/DOL hearing on target date funds held in June of this year. 
The fourth witness was John Rekenthaler from Morningstar, an investment research firm, who highlighted the company's September report on target date funds. Ralph Derbyshire testified on behalf of Fidelity, which has the largest target date fund market share. Finally, Michael Case Smith, from Avatar Associates, discussed what is known as "self dealing" and other conflicts of interest posed by the companies constructing target date funds.
Today's hearing is the third in a series the Aging Committee has held on strengthening the 401(k) system. In October 2007, the Committee addressed the issue of hidden fees in 401(k) plans, which can have a significant impact on retirement savings over several decades. In February of this year, Kohl was joined by Senator Harkin in the reintroduction of the Defined Contribution Fee Disclosure Act (S. 401) to require the adequate disclosure of 401(k) fees. In July 2008, the Committee examined the long-term effects of 401(k) loans and withdrawals on workers' retirement savings. Earlier this month, the GAO released a report on the topic, urging action by DOL, the Department of Treasury, and Congress. Kohl will soon introduce the SEAL 401(k) Act to address some of GAO's recommendations in order to reduce the effects of 401(k) loans and withdrawals. 
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