Management and Investments


Concerns about the proper administration and management of retirement funds have been raised frequently, particularly in the context of mergers, acquisitions, and other events that may lead to conflicts of interest. Specific issues include greater plan-participant representation, disclosure in investment decisionmaking and plan investment policies, and disclosure of management fees and expenses charged to participants’ accounts. Reform in these areas can help prevent conflicts of interest and protect participants.

Issues have also arisen with regard to 401(k)s and similar plans. Employee retirement security is put at risk when participants’ portfolios are not properly diversified. Although the situation has improved in recent years, at one time individuals were overinvested in one asset: the employer’s stock (even though employers are required by law to provide several investment options). The Taxpayer Relief Act of 1997 limited the amount of employer stock or real estate in which employees can be required to invest their 401(k) contributions under some circumstances. However, these restrictions do not apply to employee stock ownership plans, an employee’s own investment decisions, or employers’ matching contributions through stock.

While many employers provide their employees with tools such as online and print information for investment education, some employees desire more individualized investment advice. Participants and beneficiaries should be assured of receiving the information they need to make informed decisions regarding their retirement plan investments and benefits. Moreover, excessive fees can drastically reduce the growth of 401(k) plan account balances. However, plan participants tend to be unaware of both the overall size and composition of the fees they pay. Regulations regarding disclosure of information by plan providers have been issued by the DOL. The Supreme Court has ruled that plan sponsors, as a part of their fiduciary responsibilities must ensure that investment options do not have excessive fees.

Target date funds (TDFs) are extremely popular, especially as they are commonly used as the default investment option in automatic enrollment. Even so, surveys of investors find that they often misunderstand the basic features of TDFs. In particular, the notions of a glide path and landing point are easily misunderstood. As a case in point, one-third of respondents to one survey did not know the date at which their landing point would be reached. In addition, another survey found that of TDF investors who relied on their employer for advice, 60 percent thought that a TDF provided a guaranteed rate of return. Finally, investors seem to be insufficiently aware of the degree of risk they have taken on. The best way to combat this lack of understanding is with a plainly written disclosure statement of how the share of stocks and bonds varies until the year when the fund reaches the landing point and what the asset allocation will be at that point. Further, the disclosure should explain as clearly as possible how the asset allocation affects the TDF’s overall risk.

Management and Investments: Policy

Fiduciary responsibility

In this policy: Federal

Fiduciary responsibility to plan participants must be steadfastly maintained.

When there is potential for conflicts of interest, plan fiduciaries should seek independent advice or step aside from decisionmaking.

Because retirement funds benefit both active and inactive plan participants, representatives of both groups should be included in decisionmaking bodies.

All people who provide investment-related advice to retirement plans (including but not limited to broker-dealers, consultants, appraisers, and insurers) should be subject to the same fiduciary standard as all other investment managers.

Account fees

In this policy: Federal

Plan sponsors and fiduciaries should ensure that individual account fees are reasonable, and should respect the relevant regulations by providing both participants and beneficiaries with a clear and comprehensive statement of the types and amounts of fees and expenses charged to their accounts.

Advising employees

In this policy: Federal

Employees should receive investment advice from a qualified adviser who is not subject to conflicts of interest and will help employees invest and manage their self-directed accounts.

Employee-executive parity

In this policy: Federal

Executives and employees should have the same rights and obligations regarding their employer’s stock.

Target date funds

In this policy: Federal

Disclosure regulations should be established that make the basic properties and related risks of TDFs as clear as possible for potential investors.

Socially targeted investments

In this policy: Federal

Any socially targeted investments made by retirement plan funds must meet the current, stringent ERISA fiduciary criteria, to ensure the protection of plan participants. Pension fiduciaries must not subordinate the interests of plan participants and beneficiaries in their retirement income to unrelated objectives. The ERISA fiduciary rule, which prohibits the acceptance of reduced return or greater risk to secure collateral benefits, should not be weakened.

Information provision

In this policy: Federal

AARP supports the provisions of the PPA that increased the amount of information provided to participants in both defined-benefit and defined-contribution plans.