WASHINGTON—The Department of Labor and the Securities and Exchange Commission on Thursday issued an investor bulletin on target-date funds to better explain their intended function, glidepaths and appropriate use (see “SEC, DOL to Require More Target-Date Info,” MME 5/3/10).

“But this really is only Phase One,” said Phyllis Borzi, assistant secretary of labor at DOL’s Employee Benefits Security Administration, addressing the Investment Company Institute’s General Membership Meeting here Friday.  “Phase Two will be a checklist for plan sponsors, primarily for use by smaller and mid-size plans.

“Phase Three will be an amendment to the QDIA [qualified default investment alternative] regulation with respect to target-date funds and the spillover application of the use of target-date funds outside QDIAs in 401(k)s and other retirement plans. Plan sponsors need to provide a lot more information,” Borzi said.

The SEC, DOL guidance on target-date funds tells investors it is aimed at helping them better understand these funds—their operations and risks, and the significant differences in their asset allocations and glidepaths over time, up to and after the target date of the fund. It suggests ways an investor can evaluate a target-date fund, directing investors to examine the prospectus for information on: performance, objectives, risk levels and fees. Find out what funds the fund-of-funds is invested in, and, in turn, what their holdings are, the agencies say.

The guidance reminds investors that target-date funds do not guarantee you will have sufficient retirement income, and while they are designed as a “set it and forget it” product, an individual’s financial situation and risk tolerance may change over time.

EBSA has a Phase Four, Borzi said. “Looking ahead, we will take a fresh look at the definition of fiduciary duty, 35 years after the passage of ERISA,” the assistant labor secretary said. “The rules need to be updated to conform with market reality. ERISA was passed in 1977, before the 401(k) space even existed. I know this is creating extreme angst, but we have a responsibility to protect participants and sponsors.”

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