Hard To Value Assets/Target Date Funds

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Chair – Steve McCaffrey
Vice Chair – David Evangelista

The Scope of this Working Group is to identify the concerns, potential associated risks, and the roles of fiduciaries, trustees, plan administrators, custodians, investment managers, accountants/auditors and participants, when Employee Benefit Plans (“EBPs”) invest in Hard to Value Assets (“HVAs”). In view of the fact that pension plan investments have increasingly involved assets for which there is not a generally recognized market, a topic for review is whether the promulgation of a regulation under section 3(18) is necessary or would be helpful and, if so, to what extent should the 1988 proposal be modified or changed, and what issues and principles should the Department be focusing on in the development of any new proposed regulations.

A second area to be addressed by the Working Group is to identify the challenges and risks associated with EBPs’ use of Target Date Funds (“TDFs”). Such TDFs have limited investment track records and employ many different investment philosophies, glidepaths and asset structures to obtain their investment returns.

Questions For Potential Witnesses

Hard to Value Assets

• Should valuation issues play a role in the selection of plan investments, and in achieving proper asset allocation and diversification?  What, if any, modifications to plan investment policies and guidelines should plans consider when utilizing HVAs?  As fiduciaries, what do you deem to be or what do you expect to be HVAs?

• Who can the fiduciary rely upon when ascertaining the value of HVAs when the fiduciary is incapable of valuing, in order to fulfill their fiduciary responsibility to plan participants:

  • Investment Manager(s)?

  • Trustee?

  • Plan Administrator?

  • Custodian?

  • Independent valuation expert/Appraisers?

• What valuation policies and procedures should a fiduciary adopt when holding HVAs?  How much reliance should be placed upon custodian or investment manager supplied values (vs. possible reporting ‘lags” or “self-provided” valuations by investment managers)?

• What is the Accountant/Auditor’s obligation to determine the proper reporting/valuation of HVAs relative to FAS 157 and FAS 158 implementation?

• If a plan holds HVAs, does the limited scope audit still effectively protect plans, fiduciaries and participants, and satisfy DOL regulations?  Are HVAs widening the disjunct between investment information being certified and the information required to be reported on Form 5500 (i.e., “fair value)?  If a plan holds HVAs, do certifications still meet the reporting requirements as originally intended under ERISA and regulations promulgated or adopted there under?  What effects do “carve-outs” and disclaimers by certifying entities, due to investments in HVAs, have on plan audits?

• What disclosures and education measures are required or suggested for Participants and Fiduciaries with respect to plans which invest in HVAs?

• Whether or what guidance is needed or would be helpful regarding the definition of “adequate consideration” under section 3(18) of ERISA?

Target Date Funds

• What should be the plan’s desired purpose in using TDFs?

• What retirement and participant assumptions should be employed by the fiduciary/investment counselor when selecting and monitoring TDFs?

• What investment strategy, investment allocation, risks and costs must be considered when selecting funds to be included in a plan?  How have these changed since the creation of TDF and what is anticipated in the future over the life of TDFs?

• How does a fiduciary/investment counselor evaluate and monitor TDFs when there is no standardized benchmarking methodology or performance metrics?  What are current benchmarking methodologies for TDFs given their short term existence?

• What criteria should be used in adopting a proprietary TDF or non proprietary TDF when creating a TDF specifically for a plan?

• What investment education and communication is required for participants with respect to plans to enable them to invest in TDFs or to assess whether they should actively manage their own investment?

• What are the different types of TDF?

• If the TDF is found to fail any criteria established by the plan sponsor’s investment committee, what options does a fiduciary have?

• What criteria would cause a TDF to require closer monitoring or even removal of the fund from the investment lineup offered to the participant?