Proposed regulations raise concern over active management in 401(k) advice. What does that imply for TDFs?

The new advice rules for 401(k) plans are creating quite a stir in the industry. One columnist shares his observations in a piece from CBS Moneywatch.

“The proposal, in part, concerns the delivery of advice to 401(k) participants. Worried that the advice might be slanted in favor of asset managers, the Department of Labor will require that the recommendations be provided by unbiased computer models. But the questions the Department is asking as it establishes the basis for those computer models have many in the brokerage industry up in arms. The questions, they fear, indicate that the guidelines for 401(k) advice will favor — if not exclusively require — the use of index funds.”

This brings a question to my mind: should target date funds only consist of passive funds as well?

The majority of target-date funds are actively managed. There have been some incredible up and downs in both equity and fixed income funds that make up the industry’s target-date fund offerings. Why are TDF investors exposed to increased risk and cost?

If shutting out active funds is too extreme, there should at least be a more rigorous and frequent process for benchmarking active performance in target date funds. Investment professionals should frequently make their cases for exposing investors to increased risk and costs. This sort of accountability seems like a no-brainer when the majority of America’s workforce is automatically place into this type of investment vehicle.