Watson Wyatt Investment Consulting, a Towers Watson company

G:\Chicago Office\10\DC Cross Practice\Compliance\Target Date\01 13 final.doc 1

Subject: RIN 1210-AB38 Target Date Fund Disclosure

Dear Sir/Madam:

This letter is the response of Towers Watson to the request by the Department of Labor (DOL) for 

commentary on the proposed amendments to current regulations on qualified default investment 

alternatives (“QDIAs”) and to participant-level disclosures required for participant-directed investments, as 

they concern target date funds.

Towers Watson is a global human capital and financial management consulting firm established on

January 1, 2010 as a combination of the former Watson Wyatt and Towers Perrin. With 14,000

associates around the world, we offer solutions in the areas of employee benefit plans, talent

management, rewards and risk and capital management. In the retirement plan area, Towers Watson is 

one of the leading providers of defined contribution plan consulting, providing consulting services on 

investments, plan design, governance and employee engagement. We consult directly with fiduciaries 

and plan sponsors to support their consideration of issues raised in target date fund selection, monitoring 

and communication, and offer investment advice through an SEC registered investment advisor, Towers 

Watson Investment Services.

Towers Watson appreciates the opportunity to provide our views on the newly proposed target date fund 

disclosures for participants. Target date funds are the predominant choice of fiduciaries for QDIAs1, and 

are often a very popular affirmative choice by participants. These trends reinforce the importance of 

prudent selection and monitoring by fiduciaries of target date fund series, and of full and accessible 

communication to participants of specific target date fund features. 

In general, we believe that more disclosures will be helpful if they encourage plan participants to carefully 

consider and evaluate the role of target date fund choices relative to their other investment alternatives. 

The requirements for more specificity concerning asset allocation changes and to set forth post target 

date contribution and withdrawal assumptions should support better understanding of how a specific 

series of target date funds is designed and intended to operate. We encourage you to add a requirement 

that disclosures also identify any assumption as to whether any additional asset classes are being 

invested in by the participant. Such disclosure should make it easier for participants to assess whether a 

specific proposed program of asset reallocation is consistent with their individual risk profile and any other 

retirement assets they have, and, whether they wish to take a more active role in rebalancing and 

changing asset allocations by not using target date funds as an outsourcing device. 

 

1 See, e.g. Towers Watson 2010 Defined Contribution Survey, which found that 72% of those surveyed who reported having a 

default investment option identified a target date or lifecycle fund as the default (with another 13% reporting a balanced or 

lifestyle fund as the default.) 

January 13, 2011 

Submitted electronically to e-ORI@dol.gov

Office of Regulations and Interpretations

Employee Benefits Security Administration

Room N-5655

U.S. Department of Labor

200 Constitution Avenue, NW

Washington, DC 20210

Attention: Target Date Amendments

191 North Wacker Drive

Suite 2100

Chicago, IL 60606-1615

T +1 312 525 2500

F +1 312 525 2550

www.towerswatson.com
Office of Regulations and Interpretations

January 13, 2011

G:\Chicago Office\10\DC Cross Practice\Compliance\Target Date\01 13 final.doc 2

To simplify (and thereby also encourage) compliance, we suggest that the final effective date be for plan 

years beginning on or after November 1, 2011 (assuming final publication in the Federal Register at least 

90 days prior). This is consistent with the general date for new disclosures for participant-directed 

investments, and would also be consistent with past effective dates for QDIA rules. Thus, for calendar 

year plans, the intent would be that QDIA notices for the 2012 plan year would need to be compliant.

We also request your reconsideration of the requirement in the ERISA Section 404(a) participant 

disclosure regulations that target date funds be treated the same as all other funds in having to offer a 

benchmark that is a ‘broad-based securities market index.’ In the preamble to those regulations, the DOL 

recognizes the value that a proportionately weighted benchmark could provide as an addition to a single 

broad based index. We believe that a proportionally weighted benchmark comprised of broad based 

indices that is tailored to the actual or intended equity, fixed-income and any other holdings of a particular 

target date fund should be considered sufficient to help a participant evaluate performance of any given 

target date fund. Having a single benchmark instead of two could reduce potential confusion and better 

support participant comparisons and analysis. Changing this requirement would recognize the absence 

of any single “broad-based” glide path and the resultant absence of any single broad-based market index 

for target path funds. Our experience is that some fiduciaries may not have a broad-based index for 

target date funds that they themselves recognize as a useful benchmarking tool, and we think it could be 

confusing for a fiduciary to be forced to illustrate a benchmark for comparison by participants that the 

fiduciary does not itself use.

The preamble refers to actual asset allocations as the source of a customized, proportionally weighted 

benchmark. We think the allocations intended under the fund’s asset allocation policy should also be 

allowed, and may in fact be preferable. Target date funds operate through frequent but often less than 

constant rebalancing. Some rebalancing is intended to restore actual asset allocations to the allocations 

intended based on the fund's policy, not as a matter of changing the glide path but of spreading 

investment gains and losses to restore the current glide path position. Some might refer to this as 

"tactical" rebalancing. Rebalancing that is part of moving a fund along a glide path might be referred to 

as "strategic." Our experience is that target date funds vary in the frequency of both tactical and strategic 

rebalancing, with possible frequencies including daily, quarterly, semi-annual and annual (and possibly 

others). To the extent a fund does not have daily rebalancing, it should be permissible to report 

performance history based on performance of each underlying fund using the intended policy allocations. 

Similarly, the appropriate benchmark should be based on the intended policy allocations using broadbased market indices. Managers that have policy discretion to allocate along their glide path or that 

depart from their policy raise special considerations where the underlying principle of like to like 

comparisons is especially important. Using actual benchmark weights rather than policy benchmark 

weights would not adequately reflect the manager’s active asset allocation decisions in its performance.

We acknowledge that not all fiduciaries may have access to the resources needed to obtain a 

proportionally weighted benchmark specific to their glide path, and that some fiduciaries may disagree 

with our expectation that having two benchmarks for a single fund will likely be confusing. We suggest 

that fiduciaries have discretion to choose among three alternatives for each target date fund: (a) a broadbased market index; (b) a benchmark comprised of passively managed indices that are themselves broad 

based, and which are used in proportional weights to actual or intended asset allocations; or (c) both (a) 

and (b), as two separate benchmarks. Adding (b) as a choice would allow fiduciaries to offer a single 

benchmark for each fund and not treat a given series of target date funds differently from all other funds. 

At the same time, (b) requires that any glide path specific benchmark be comprised, at an asset class 

level, of broad-based indices and so should meet concerns about objectivity. 

While the focus of these regulations and our comments is on participant disclosures, we believe these 

disclosures can also be helpful by encouraging plan fiduciaries to carefully consider and evaluate 

alternative target date fund series. These regulations focus on asset allocation (“glide path”) and fees, 

and we agree that these are critical components for consideration; however, we also see other criteria as 

important and look forward to continued market innovation. We understand that the DOL is considering 

additional guidance to plan fiduciaries on the processes and criteria intended to support prudent selection

and monitoring of target date funds. We encourage this effort and urge that the DOL not seek to provide 

an all inclusive list of criteria or processes and instead bring attention to other aspects that can be 

important in assessing the risk position of a given target date fund series for a particular set of plan 

demographics, while also noting that as markets evolve, new criteria are likely. A non-exclusive list would 

include such considerations as active versus passive strategies, the degree of alignment of underlying 
Office of Regulations and Interpretations

January 13, 2011

G:\Chicago Office\10\DC Cross Practice\Compliance\Target Date\01 13 final.doc 3

managers with managers of other investment menu choices, the potential for using glide paths and 

managers that are not affiliated with other providers, the use of alternative asset classes, and 

implementation strategies and tactics. 

Thank you for the opportunity to share our views and information with you on this important matter. If you 

have any questions about our response, please contact either of the undersigned.

Sincerely,

Alexander T. Dike Sue Walton

Senior Retirement Consultant Senior Investment Consultant

Towers Watson Delaware Towers Watson Investment Services

312-525-2297 312-525-3264

Alec.Dike@TowersWatson.com Sue.Walton@TowersWatson.com