Target Date Funds: Here Today...Regulated Tomorrow

For a while now, target date funds have seemed like a good option for retirement plan investors, many of whom don't want to sort through dozens of funds and don't know how to determine the right mix of investments to suit their retirement needs or their risk tolerance. Instead, plan participants could simply choose a fund based upon their retirement date, and the actively managed funds would shift over time to provide an appropriate asset mix. For investors who didn't want to spend a lot of time monitoring and researching their holdings, they were like a simple solution.

So it's no wonder 401(k) plan money has poured into the funds since their arrival in the market nearly two decades ago. And in 2006, when the Department of Labor deemed them a suitable automatic enrollment default option, participation accelerated.

Now, however, the plans are under scrutiny, with the Department of Labor and the Securities and Exchange Commission hosting a joint, all-day hearing featuring dozens of investment advisors, fund representatives, and industry analysts last week to determine whether target date funds require increased regulation or disclosure.

These target date funds are a combination of stocks, bonds, equities, money markets, cash reserves, indexes and other mutual funds. The fund managers will often put their worse performing funds into these target date funds to help bring money into the lower ranked and lower performing funds. These funds allocations are often not conservative enough and therefore are not suitable, which can cause issues for the fiduciary duties of the plan administrator. The underlying funds are often not known, and neither are the expenses for having stocks inside of a mutual fund, and mutual funds inside of a target date fund. 

Be on the look out for changes to these funds in the coming months, more regulation will be needed to ensure that the investor is aware of what these funds represent and the dangers that people face when investing their money into Target Date Funds.