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As the Department of Labor’s (DOL) Employee Benefits Security Administration’s (EBSA) comment period regarding its proposed disclosures for target date funds ends Friday, industry groups are telling EBSA to remedy some trouble spots in its proposal.
For instance, the American Society of Pension Professionals and Actuaries (ASPPA) and the National Association of Independent Retirement Plan Advisors (NAIRPA) asked EBSA in their joint comment letter to clarify the “ambiguity” in the proposed regulation regarding a glide path illustration that must be provided explaining the fund’s asset allocation, how the asset allocation will change over time, and the point in time that the fund will reach its most conservative asset allocation.
The proposed reg states that a chart, table or other graphical representation not “obscure or impede” a participant’s or beneficiary’s understanding of information required to be explained, the two groups state. However, “given the ambiguity in the language in the Proposed Regulation, plan fiduciaries will have difficulty determining whether they have satisfied this requirement. As a result, ASPPA and NAIRPA suggest that the Department adopt the standard for target date fund disclosures that is used in the context of summary plan descriptions, i.e., where information must be provided ‘in a manner calculated to be understood by the average plan participant’”
The SPARK Institute also raised the same concern about the glide path illustration in its comment letter. “Although it appears that EBSA’s goal is for participants to receive simple and understandable information, we are very concerned that the disclosure requirement includes the subjective qualitative standard that the chart, table or illustration does not obscure or impede a participant’s understanding of the other disclosures. We believe that the standard is too subjective, is vague and is subject to very different interpretations,” the SPARK letter said.
ASPPA and NAIRPA also asked the EBSA to include additional disclosures for participants to help them select the appropriate target date fund, including the ramifications for 401(k) participants who take lump sum cash distributions at retirement, as well as a statement regarding disparate ages between spouses.
Both groups said that most participants take their distributions in cash lump sums at retirement, and that “even if they roll their distributions over to an IRA, they may not reinvest (or be able to reinvest) in the same target date funds.”
Thus, the groups continued, “any fund in which the landing point is 20 years after retirement may be wholly inappropriate for that participant. Our point is not to engage in a debate of the ‘to’ versus ‘through’ glidepaths, but to emphasize that disclosure of asset allocation at the target date and/or the landing point, while helpful, may not be sufficient.”
Regarding the potential impact of disparate ages between spouses, the two groups explained that a target date fund for a participant who intends to retire at age 70 (with a life expectancy of 16 years) and a spouse that is age 68 (with a life expectancy of 22 years) may not be appropriate for a 70 year-old with a 55 year-old spouse (whose life expectancy may be 35 years).