The chairman of the Senate Aging Committee, Herb Kohl, D-Wisconsin, has asked the Department of Labor to establish rules and regulations governing the composition and advertising of target-date retirement funds.
In a letter Tuesday, February 24, to Hilda Solis, who has been confirmed as labor secretary, Kohl said different target-date funds—approved by the Labor Department as a qualified default investment alternative for defined-contribution plans—had significantly different asset allocations that could expose investors to excessively high risk.
“According to the Dow Jones Target Portfolio Indexes, a firm’s asset class allocation for 2010 target date funds’ equity should be around 27% in equities,” Kohl wrote as an example. “Despite this, a number of large investment firms have equity holdings well over 50%, exposing employees to excessive risk and ultimately, huge financial losses.
“These products are designed to automatically reallocate funds over time from equities toward fixed income and cash so that, when a person reaches their retirement age, the majority of their investments are no longer in equities. Yet, one 2010 target-date retirement fund with such holdings lost over 40% in 2008. A loss of this magnitude simply should not occur in a financial product that was designed and is specifically advertised to limit risk and volatility as one nears retirement,” Kohl wrote.
In a separate letter Tuesday, Kohl also asked Securities and Exchange Commission Chairman Mary Schapiro to look at the underlying composition of the funds and how the asset allocations are disclosed.
Filed by Doug Halonen of Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.
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