SPARK Calls for Simplification of Target-Date Disclosure Rules

Larry H. Goldbrum, general counsel, noted that the proposed regulation’s requirement that a plan administrator include a chart, table or other graphical representation that illustrates the change in a fund’s asset allocation over time in a way that “does not obscure or impede a participant’s or beneficiary’s understanding of the information explained…” is too subjective, vague and subject to various interpretations.  “We are concerned that the standard, as written, lays the groundwork for significant needless and frivolous litigation that will be based on disputes about the clarity of charts and illustrations,” said Goldbrum.  “As a result, we are urging EBSA to modify the language to state that ‘the chart, table or illustration is presented in a manner calculated to be understood by the average participant,’ since that language has been used by EBSA in other regulations.”  

In addition, SPARK noted that the proposed regulation requires an explanation of the age group for whom the alternative is designed, the relevance of the date and any assumptions about a participant’s … contribution and withdrawal intentions on or after such date.  “It appears that EBSA is attempting to clarify for participants whether a particular fund is designed for investment ‘to’ a participant’s retirement date or ‘through’ the participant’s retirement,” said Goldbrum.  He contended that the explanation “would be lengthy and complicated, and is not likely to be readily understood by the average plan participant.” The SPARK Institute suggested revised language for this section.  

More Time Needed  

In its letter to the Employee Benefits Security Administration, the SPARK Institute requested that EBSA modify the effective date of the target-date fund disclosure proposal from 90 days to one year after it is finalized and published in the Federal Register so that plan sponsors and service providers have more time to comply with the number of broad and significant new regulations that were issued in 2010. “Providing more time will not only improve the quality of compliance but will also help plan sponsors and service providers to manage the cost of doing so,” said Goldbrum.    

Singling out Target-Date Funds  

Another concern for the Institute is a requirement that plan administrators include a statement in the disclosures that a participant “may lose money by investing in the alternative, including losses near and following retirement and that there is no guarantee that the alternative will provide adequate retirement income.”  Goldbrum said: “We are concerned that this statement will have the unintended consequence of creating a potentially negative perception of target date funds in comparison with other investment options.” He noted:  “All plan investment options involve varying degrees of risk and EBSA should not single out target date funds, since they may be a good choice for many participants.”  

The Proposed Regulation amends the disclosure rules for QDIAs by requiring plan sponsors to provide participants with more detailed fee and performance information.  “We are concerned that some of the newly required information does not directly apply to, or may not be available from, a QDIA that is an investment management service (e.g., ‘managed accounts’) as described under current QDIA regulations,” said Goldbrum.   “Accordingly, with respect to a QDIA that is an investment management service, we requested that the identity of the investment manager for the service may be disclosed, that the requirement for historical performance data be eliminated, and that the fee disclosure requirement be modified to account for the unique nature of these investments.”