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September 10, 2021 Issue: Summer 2021

Target Date Funds: Facing Increasing Congressional, Regulatory, and Legal Scrutiny

By: Marla J. Kreindler (Chicago, IL), William J. Marx (Philadelphia, PA), Elizabeth S. Goldberg (Pittsburgh, PA), Morgan, Lewis & Bockius LLP

In recent years, target date funds (“TDFs”) have become a very popular investment option on participant-directed defined contribution retirement plan investment lineups. But, as discussed in this article, as TDFs have grown in popularity, there are signs of increasing scrutiny around TDFs used in these ERISA plan investment lineups. This increasing scrutiny is expected to raise new regulatory initiatives generating new questions and may favor increased process review by ERISA plan fiduciaries.

Background on TDFs

A TDF is an investment fund (usually part of a family or series of investment funds) that is managed in accordance with a dynamic asset allocation “glidepath” with the intention of achieving an appropriate risk and performance level over time corresponding to a specific targeted retirement date (e.g., a 2020, 2030, 2040, 2050 TDF). Traditionally, for TDFs in the series with a later target retirement date (for example, a 2050 TDF), the TDF focuses more on growth of capital through a larger equity allocation. By comparison, for TDFs in the series with a closer target retirement date, the TDF’s asset allocation moves down the glidepath to become more conservative (in an effort to protect capital) through a larger fixed income allocation.

The increasing popularity of TDFs is illustrated by the sharp increase over the past two decades in the number of plans offering TDFs as investment options, in particular as the qualified default investment alternative (“QDIA”) or the “default” investment option in most plans, and the flood of plan assets under management (“AUM”) being allocated or mapped into TDFs. Even when not serving as a plan’s default investment option, TDFs can be popular investment elections among plan participants because TDFs permit plan participants to choose a TDF and “set it and forget it.” Plan participants can enjoy a “professionally managed” approach to their asset allocations without the burden of monitoring their portfolio to adjust their asset allocation over time. This can be particularly appealing for plan participants who are less sophisticated with regard to retirement investing. As the demand for TDFs has grown, a robust marketplace has created TDFs highlighting different strategies, including in many instances, variations in asset types and glidepath allocations, in an effort to create best in class strategies for participants, gain a competitive edge in the TDF market, and attract AUM.

As TDFs have grown in popularity, and emphasis in plan investment lineups, there are signs of heightened scrutiny of TDFs. As discussed in this article, this scrutiny is challenging plan fiduciary TDF decision making from three angles—from Congress, from regulatory agencies and from plaintiff’s attorneys. With TDFs in the spotlight, plan fiduciaries may want to consider reviewing and adjusting their process for selecting and monitoring TDFs.

Congressional Interest

As a result of the growing popularity of TDFs and the rapid proliferation of TDF offerings to retail and individual investors, lawmakers are starting to ask more questions to better understand the potential risks and downsides of TDFs for ERISA plan participants. In a recent joint letter (the Murray-Scott Letter) to the US Government Accountability Office (GAO), Senator Patty Murray, Chair of the Senate Committee on Health, Education, Labor & Pensions; and Representative Robert “Bobby” Scott, Chairman of the House Committee on Education & Labor called for the GAO to review TDFs because “[t]he millions of families who trust their financial futures to target-date funds, need to know these programs are working as advertised and providing the retirement security promised.”

The Murray-Scott Letter presents two key concerns. First, it alleges that the evolving market for TDFs has resulted in a universe of available TDFs for which “expenses and risk allocations vary considerably.” The letter appears particularly focused on how TDFs are marketed as “set it and forget it” investments, plan participants may be trusting the glidepath of the TDF available under their plan without understanding if the fund offers the appropriate (for their particular financial circumstances) time horizon and risk tolerance. The Murray-Scott Letter cites studies indicating that TDFs may in fact be too heavily weighted toward equities as the targeted retirement date draws near, resulting in an overexposure of risk to the plan participant.

The Murray-Scott Letter also questions the appropriateness of the use of “potentially higher risk and more lightly-regulated ‘alternative’ assets, such as private equity” to populate TDF asset allocations. The lawmakers refer to Information Letter 06-03-2020 (the Information Letter) issued by the Trump administration’s Department of Labor (DOL), which they assert “paved the way” for the use of alternative assets such as private equity investments TDFs.

In a call to action for the GAO, the Murray-Scott Letter sets forth several questions spanning the following TDF-related topics:

  1. The extent of TDF use in defined contribution plans;
  2. The impact of market fluctuations and turbulence on TDFs, particularly as the targeted retirement date draws near, and specifically the impact of the COVID-19 pandemic on TDF performance;
  3. Plan participant engagement with TDFs where the plan participant has been defaulted into a TDF;
  4. The overall variations of asset allocation and fee structure across the TDF market and a comparison to other investment products;
  5. TDF marketing and disclosure, in particular the variation of cost and asset allocation across TDFs;
  6. Off-the-shelf TDFs versus custom TDFs;
  7. Use of alternative assets in TDFs and disclosure of risks and benefits of TDF asset allocations to plan sponsors and participants;
  8. The DOL’s views on monitoring fiduciary activity with respect to the selection and monitoring of TDFs as plan investment options;
  9. Participant behavior in selecting TDFs when they are made available in investment lineups, including consideration of the design of the investment lineups; and
  10. Possible regulatory or legislative options to bolster plan participant protections, retirement security, and the goals of TDFs.

Regulatory Focus – DOL and SEC

At the same time, there are also signs of increasing federal regulatory interest around TDFs. The interest of regulators in TDFs can be reviewed from the DOL’s issuance of its final rule providing fiduciaries relief for defaulting plan investments in qualified default investment alternatives (the QDIA Regulations) in response to a call to action by Congress in its enactment of the Pension Protection Act of 2006. In the QDIA Regulations, reference was made specifically to investment alternatives with asset allocations based on the participant’s “target retirement date” as one of only four types of investment alternatives that meet the definition of a QDIA, therefore qualifying for fiduciary relief.

In May 2010, the DOL and the Securities and Exchange Commission (SEC) published a joint Investor Bulletin regarding Target Date Retirement Funds, which addressed the nuts and bolts of the operation of a TDF and considerations in evaluating TDFs. Later in 2010, the SEC and DOL each issued proposed rules relating to TDF disclosures, including calling for advanced disclosures concerning TDF asset allocations and glidepaths. Later in February 2013, the DOL issued guidance titled “Target Date Retirement Funds–Tips for ERISA Plan Fiduciaries,” which detailed several best practices for plan fiduciaries to consider when selecting and implementing TDFs as investment options under participant-directed defined contribution plans (DOL TDF Tips).

More recently, SEC interest in TDFs resurfaced in 2019 when it issued a risk alert identifying that TDF examination initiatives had uncovered potential disclosure and operating policy and procedure issues.

In addition, the DOL has recently focused on issues related to TDFs. This focus has included an interest in the use environmental, social, and governance, or ESG factors in QDIAs. Another example was in May 2021 when DOL Acting Assistant Secretary Ali Khawar indicated that the DOL is reconsidering the Information Letter issued under the Trump DOL, which provided some support for the use of alternative assets such as private equity investment in participant-directed defined contribution plans. In recent statements, Mr. Khawar stated that the DOL was reevaluating the risks of the use of alternative investments in such plans, and especially in TDFs used in smaller plans.


The third area of interest is in the courts as there have been recent legal claims challenging TDF offerings. As a result, court cases are also focusing on the prudence of different TDFs in ERISA plans and fiduciary decision making in selecting and monitoring TDFs. Some of these lawsuits challenge TDFs based on the all-too-familiar “excessive fees” claims. Others include claims of imprudent management and oversight. Recent claims have alleged the plan fiduciary inappropriately permitted expensive alternative investments to be used in the plan’s TDF asset allocation (echoing the concerns raised in the Murray-Scott Letter). Another suit included claims that the plan fiduciary imprudently hired a TDF investment manager with too limited experience and track record to manage the plan’s TDFs.


In light of the congressional and federal regulatory agency interest and continuing deluge of plaintiffs’ class action claims involving TDFs, we note these observations:

  1. Trending. On the one hand, it may not be shocking that TDFs are appearing in the headlights of Congress and regulators or finding themselves a topic in courtrooms. More and more plan participants are turning to TDFs to invest their assets than ever before; resulting in their retirement security resting in the hands of TDF sponsors and the plan fiduciaries select them.
  2. Watch for Future Regulatory Focus. Question 8 of the Murray-Scott Letter specifically directs the DOL to scrutinize plan sponsors’ and fiduciaries’ selection and monitoring of TDFs as plan investment options. We see this as a call to action that could be indicative that TDFs may be on the radar of regulators for future regulatory reviews.
  3. Possible Increasing Risks. Given the three prongs of interest (by Congress, regulators, and private litigants), there may be increasing risks. As a result, plan fiduciaries may want to give consideration to their defined contribution plan’s TDFs now to secure against these risks. This could include reviewing the questions raised in the Murray-Scott Letter, the DOL’s subregulatory guidance (including in the DOL TDF Tips publication) and public statements, and recent legal claims against their current TDF offering. For example, some of the questions might include:
  • Are fees and expenses reasonable considering the glidepath and asset allocation of the TDFs?
    • Are asset allocations across the full TDF family designed to reflect the risks?
    • Is the manager of the TDFs experienced in the management of TDF glidepaths and asset allocations and does the manager have a suitable performance track record? If not, does the manager have relevant experience managing other retirement plan investment products?
    • How do the various styles, strategies and structures of TDFs and their glidepaths compare?
    • Has sufficient information and disclosure been provided to plan fiduciaries, and how is the plan disclosing information to participants to aid their understanding of how the TDFs are structured?
    • How are plan fiduciaries documenting and recording their process for the selection and monitoring of TDFs?

While these inquiries are not mandatory, they reflect the concerns raised in the Murray-Scott Letter, the DOL’s statements and recent legal claims, and could be considered as part of a fiduciary evaluation of TDFs.

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