Financial advisors and retirement plan managers are going to be required to make some changes in their reporting on target-date funds that are designed to clarify the investments for consumers, notes Edward M. Lynch Jr., a retirement expert with Dietz & Lynch Capital.

Target-date funds have become increasingly popular since their introduction in 1994, especially for 401(k) and 403(b) retirement plans. Total retirement plan participants is now up to 72 million with $3 trillion in assets, which includes target-date funds. The funds are one of the latest investment products to come under the scrutiny of the U.S. Department of Labor, with the goal of providing greater transparency for the investor.

DOL has proposed changes to make the investments and the investors' options clearer. The comment period for proposed changes closed January 14 and, assuming they are enacted as planned, the changes will make it easier for investors and plan managers to see how the investments are changing over time, but will require more scrutiny of the information by plan managers and advisors. The SEC recently made similar changes for reporting.

Target-date funds start with a given percentage of assets in equities, bonds and possibly an alternative investment. The premise is that the fund can switch its holdings from mainly equities to bonds as the investor nears retirement age and the target date.

"But between those two dates there can be a wide variety of differences, and the 'glide path' to switch to more secure bonds can vary greatly from one fund manager to the next," says Lynch, who was one of the first practitioners in the country to complete the Accredited Investment Fiduciary Analyst (AIFA) program through the Foundation for Fiduciary Studies, then domiciled at the University of Pittsburgh.

Investors and plan managers always received regular reports on plan investments. However, the new DOL regulations, if approved, will require investors to receive an annual plain language explanation of the current status of the investments and a graphic of the same information.

"We started talking about this before 2008, but the market situation then prompted action to be taken," Lynch says. "The changes will make it easier to determine if the right investments are being made to suit the group of employees, if it is an employer retirement plan, or the investor, if it is an individual.

"My recommendation is for the plan manager to do due diligence given this clearer information to see if any changes need to be made," he adds. "The same thing goes for financial advisors. They should conduct a thorough analysis of the target-date offerings they have in their portfolios and make sure they are appropriate for the employee population. If they are not appropriate, the manager or advisor needs to see what steps can be taken to rectify it.

"A manager or advisor may even want to look at some alternative funds, depending on the risk the investor is willing to take at retirement age. He or she needs to know what other assets the investors have and when and how will they use the target-date funds.

"Some funds have many choices within the fund itself, others are limited, so a change of funds might be desirable," he adds.
In some plans changes can be made, inappropriate funds can be sold and new ones bought or changes can be made within the existing plan for the mix of investments, but the fees and penalties that go along with making any changes have to be weighed against the benefits.