Meanwhile, the SEC weighed in last year with a proposed rule to provide more information to investors in target-date funds to help them better assess the fund's anticipated investment glide path and risk profile.

Larry Medin at Avatar has been lobbying the Labor Department to include the mutual fund industry under ERISA's fiduciary standard. "When a fund family creates a target-date fund by allocating to it from some of its existing mutual funds, and are doing business with themselves with the opportunity to make additional money [from the fund fees], that's self-dealing and would be a clear conflict of interest and a prohibitive transaction for any party under ERISA except a mutual fund," he says.

The Investment Company Institute (ICI), the mutual fund industry's trade group, sees things differently. In a February comment letter to the Labor Department regarding the re-evaluation of the fiduciary standard, the ICI wrote that simply selling an investment product shouldn't be a fiduciary act, and that while the process of selling an investment may involve an implicit recommendation by the seller, it doesn't mean a seller's activities constitute ERISA investment advice.

And in an October 2009 letter to the U.S. Senate Special Committee on Aging, ICI wrote that concerns about target-date funds using proprietary funds as underlying funds is misplaced. "There are many reasons why a fund provider would determine that using proprietary funds is the best way to achieve a fund's objective," it wrote. "In addition, there are regulatory hurdles that make it more difficult for mutual funds to use non-proprietary funds."

Jason Roberts, CEO of the Pension Resource Institute, a Manhattan Beach, Calif.-based consultant to RIAs and broker-dealers on ERISA-covered retirement plans, believes it's highly unlikely that mutual funds will be required to sign on as fiduciaries. But he does think the fiduciary issue will resonate with plan sponsors, and that in the wake of the upcoming 408(b)(2) regulation to improve 401(k) plan transparency, provider-agnostic companies such as Avatar are very well-positioned.

"They'll market them as fiduciary and they'll probably get some market share," Roberts says. "I think that applies to the collective funds that Avatar uses."

Naturally, Avatar would agree with that assessment. "We want to bring about change to the industry by lowering fees, eliminating conflicts of interest, and increasing the level of trust participants can place in the financial services industry," Carlson says.


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