Newsletter for public sector employers on compliance and

best practices for today's defined contribution plans Volume XI - Summer 2009

Are Target Date Funds Failing Investors?

Note from the
Consultants… Many plan sponsors have added target date funds to
investment menus in 401(k), 457 and 403(b) plans as an easy and
There are unique challenges associated appropriate way to save for retirement. But are all target date
with selecting and monitoring target date funds equal and are they being communicated properly to
funds. Even if this process is handled investors?
through outsourced services, it is As a result of the increased use of these investments in
important for plan sponsors to have a employee-directed retirement plans (particularly as default
basic understanding of various issues that investments) and the recent economic turmoil, target date funds
should be considered in the fund review. are being put under the microscope. Legislators, regulators and
Target date funds have come under policy makers are taking a hard look at how these investments
increased scrutiny by regulators and the have faired over the past year.
media because of their use in retirement On June 18, 2009, the Securities and Exchange Commission
plans and the severe losses that many (SEC) and the Department of Labor (DOL) held a joint hearing
have experienced over the past year. to examine various issues surrounding target date funds. What
Plan sponsors and participants need a is being determined through closer scrutiny is that many,
better understanding of how these fund particularly those labeled as appropriate for someone nearing
vehicles work to ensure informed retirement, are failing investors.
decisions are being made as to their One reason that these funds have become popular is the “set
appropriateness for long-term retirement it and forget it” approach that they provide. Participants trust
savings. that their investments will become more conservative toward the
end of the fund’s glide path to protect their investment. But just
Sincerely, how the asset allocation shifts is one major concern that has
Paul Hackleman, SST Benefits Consulting been raised.
Bill Tugaw, SST Benefits Consulting For instance, there is no uniformity as to the asset allocation
Mary Willett, Willett Consulting or strategy that is used by managers as the target retirement date
nears. According to information gathered for the recent
hearing, the stock holdings of 2010 target-date funds ranged
Check out the new SST Benefits Blog from 8 percent to 68 percent. Compare this to the target date
http://sstbenefitsblog.blogspot.com/ index created by Dow Jones that says equity allocations should
approximate 27 percent of the portfolio in 2010 funds.
Comments and articles from the SST team as Because of the varied asset allocation, it should be no surprise
well as links to articles that are important to
the plan sponsor community will be posted.
that the 2008 returns of 2010 target-date funds ranged from a
You are invited to post your comments and minus 3.6 percent to minus 41 percent, with a minus 25 percent
forward the posted items to colleagues. overall average. For participants retiring next year and placing
their confidence in target date funds to protect their assets,
Currently you can find:
- Anheuser-Busch Sued for Poor QDIA Choice
significant losses such as this can be devastating.
- Rebuilding Target Date Portfolios – White Paper Understanding the differences between the various target date
(SST Benefits Consulting / Dauenhauer) funds and the importance of adequate participant
- Target-Date Mutual Funds May Miss communication is critical for plan sponsors and fiduciaries.
Their Mark (NY Times article)
Continued on page 3

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 Washington Insider
National Save for Retirement Week
Before beginning their August recess, Congress passed resolutions to establish October 18th to 24th as this year’s National
Save for Retirement Week. The Senate resolution (S. Res. 234) was co-sponsored by Senators Kent Conrad (D-ND) and
Michael Enzi (R-WY); the House resolution (H. Res. 662) was co-sponsored by Representatives Allyson Schwartz (D-PA)
and Sam Johnson (R-TX). This is the fourth year that Congress has established a National Save for Retirement week with
the goal of raising public awareness about the many tax-favored options that can be used to save for retirement.

Proposed Legislation
Although the Obama Administration and Congress have been focusing on health care reform, there have been a few
legislative proposals introduced over the past few months that may impact the retirement plans of state and local
governments. The following provides a brief description of some of these proposals.

The 401(k) Fair Disclosure and Pension Security Act of 2009 (H.R. 2989) was approved by the House Education and Labor
Committee on June 24, 2009. This bill combines the 401(k) Fair Disclosure for Retirement Security Act of 2009 (H.R. 1984) and
the Conflicted Investment Advice Prohibition Act of 2009 (H.R. 1988) that were previously introduced by Representatives George
Miller (D-CA) and Rob Andrews (D-NJ), respectively. The combined bill amends the Employee Retirement Income Security
Act (ERISA) to require certain fee disclosures to plan sponsors from providers as well as to participants from the plan.
These new mandates include disclosures pertaining to potential conflicts of interest and a requirement that the plan offer a
specified indexed investment option to meet ERISA section 404(c) safe harbor rules. Although this bill only applies to plans
subject to ERISA, if enacted, it could have implications for state and local government plans in the future.

The Defined Contribution Plan Fee Transparency Act of 2009 (H.R. 2779) was introduced by Representative Richard Neal (D-MA),
Chairman of the House Ways and Means Subcommittee on Select Revenue Measures on June 9, 2009. This bill covers both
ERISA and non-ERISA plans, including 403(b) and governmental 457(b) plans. Instead of amending ERISA, this bill would
amend the Internal Revenue Code (IRC) to require certain disclosures to plan sponsors and participants regarding plan fees
and potential conflicts of interest, but with less specific details and itemization than the 401(k) Fair Disclosure and Pension
Security Act. This proposal does not include a requirement pertaining to the investment options that must be made available
under a plan.

The Defined Contribution Fee Disclosure Act of 2009 (S. 401) was introduced on February 9, 2009 by Senator Tom Harkin (D-IA)
and is co-sponsored by Senator Herb Kohl (D-WI), Chairman of the Senate Special Committee on Aging. This bill would
not apply to state and local government plans as it would only amend ERISA, not the IRC. As with the two bills mentioned
above, it mandates that certain disclosures regarding fees be made by providers to plan sponsors and also from the plan to
participants. It does not include a requirement for an indexed investment option to comply with section 404(c).

The Retirement Security Needs Lifetime Pay Act (H.R. 2748) was re-introduced by Representatives Earl Pomeroy (D-ND) and
Ginny Brown-Waite (R-FL) on June 8, 2009. This bill provides tax incentives for distributions from retirement accounts that
are established to provide lifetime income to the account holder. The tax incentives would exclude a portion of the lifetime
income payments received from certain plans from annual taxable income. It also would exclude amounts that are used to
purchase longevity insurance from the calculation of required minimum distributions (RMD) from qualified plans and IRAs.

Retirement Security for Life Act (S. 1297) was introduced on June 18, 2009 by Senators Kent Conrad (D-ND) and Pat Roberts
(R-KS), members of the Senate Finance Committee. This is companion legislation to the Retirement Security Needs Lifetime Pay
Act (H.R. 2748). Last year, a similar bill received broad support in both chambers of Congress, with 79 co-sponsors in the
House and 12 in the Senate.

SEC Proposed Rule: "Pay to Play" Practices

The Securities and Exchange Commission (SEC) recently released a proposed rule under the Investment Advisers Act of
1940 that is designed to: prohibit advisers from using hidden payments (such as through placement agents) to influence
decisions of government officials regarding investments. The rules also would restrict or limit contributions and curtail "pay
to play" practices by investment advisers seeking to manage money for state and local governments. The proposed rule can
be found here: http://edocket.access.gpo.gov/2009/pdf/E9-18807.pdf.

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Target Date Funds – What Plan Sponsors Need to Know
Selecting and monitoring investments included in the 457, 403(b) or 401(k) plan is a critical fiduciary
responsibility. Target date funds present unique challenges that need to be addressed when conducting initial and
on-going reviews. Along with all of the normal factors being explored (e.g., performance, expense ratio, etc.),
additional consideration should be given to understand and answer the following:
What does the “target date” really mean?
How are the underlying investments within each fund selected and monitored?
What is the total cost to participants – the underlying fund fees as well as the target date fund fees?
“Target Date” Meaning: “To” or “Through” Retirement
Target date funds are designed as an easy way to maintain diversification that is appropriate over a set length of
time – or the fund’s glide path. One of the problems being discovered with the various funds is that the target date
has more than one meaning among investment managers.
For example: In a 2010 fund, some funds appear to be managed using 2010 as the
year retirement begins and the assets are starting to be used and transferred
somewhere else. Other managers expect the investor to leave assets in this fund
throughout retirement and 2010 is the expected retirement end date or when assets
are depleted. Because there is no uniform definition of “target date”, the asset
allocation of funds with the same or similar glide path can have widely different
investment allocation strategies and results (see article on page one).
As a plan fiduciary, the investment approach for the glide path that is used by managers should be thoroughly
understood and considered in the review and analysis of target date funds. Communication to participants should
provide clear and concise information about what the target date means and sufficient details to help them
determine which glide path may be the most appropriate to meet their needs.
Underlying Investments
Target date funds are typically structured as a fund of funds – meaning that the investments are held in other
mutual funds within the fund family or plan. Understanding how the specific investments are selected for the target
date portfolio is a critical factor that fiduciaries should consider.
Mutual fund families will typically have more than one fund within a specified asset class. Once an asset
allocation strategy is set for the target date fund, the manager must then select one or more of the mutual funds
within the identified asset classes to be used in the portfolio. It is important that the rationale used to make this
decision is based solely on what is best for the fund’s investors, not the interests of the mutual fund company.
Total Cost
Because target date funds are typically fund of funds, there can be multiple layers of fees that
must be considered by plan fiduciaries. The target date fund will generally have a stated expense
ratio that applies to the management of this fund. However, there may also be charges associated
with the underlying investments that can add significant costs to participants who invest in this
option. Fiduciaries must prudently identify and monitor the total cost of this investment vehicle.

This newsletter is not intended to provide legal guidance or advice. Questions about this newsletter
and information on consulting services can be directed to:

Mary Willett Bill Tugaw Paul Hackleman

Willett Consulting SST Benefits Consulting SST Benefits Consulting
608-455-1026; 608-469-2506 800-345-1118 650-344-0422
422 Game Ridge Trail 4364 Town Center Blvd., #315 232 Stanley Road
Oregon, WI 53575 El Dorado Hills, CA 95762 Burlingame, CA 94010
mary@willettconsulting.com billtugaw@sstbenefits.com paulhackleman@sstbenefits.com

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