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U.S. Senate Special Committee on Aging

Default Nation:  Are 401(k) Target Date Funds Missing the Mark?

Statement of the Investment Company Institute

October 28, 2009

The Investment Company Institute 1 is pleased to provide this written statement in connection with the hearing in the U.S. Senate Special Committee on Aging titled “Default Nation:  Are 401(k) Target Date Funds Missing the Mark?” Target retirement date funds are an important innovation in retirement savings and are being used effectively today by many defined contribution plans and retirement savers. The Committee’s interest in target retirement date funds was inspired by the market events of 2008, during which many target retirement date fund investors saw significant losses in their accounts. The Institute supports efforts by the Committee and the Department of Labor and the Securities and Exchange Commission to review the impact of 2008 market events and consider whether any improvements should be made to the law or the regulations and guidance issued by the DOL under the Employee Retirement Income Security Act of 1974 (ERISA) and the SEC under the federal securities laws to help assure that target retirement date funds continue to meet the needs of plans and participants.

In our view, the focus on the impact of market events on target retirement date fund investors underscores the need to redouble efforts to educate retirement savers about investing, retirement savings products and what they are designed to do, and the benefits of consistent retirement saving. The federal government should be careful not to legislate or regulate specific details in the design, management, and use (or plan selection) of target retirement date funds. If policymakers decide to develop new rules for target retirement date funds, it is imperative that the rules must apply to all target retirement date fund products, regardless of whether they are offered as mutual funds or other pooled products, such as collective investment trusts, or separate accounts of insurance companies.

I. Introduction

Target retirement date funds provide an efficient way for an investor to invest in a mix of asset classes through a single fund that both rebalances its asset allocation periodically and becomes more conservative over time. These funds use a long-term investment strategy that should not be judged by one year of performance. Most asset classes, other than Treasury securities, performed poorly in 2008. 2 As a result, investment portfolios of all kinds—from defined benefit plans to college endowments to individually advised portfolios—suffered. The S&P 500 total return index lost 37.0 percent in 2008, and average losses of target retirement date funds with target dates between 2000 and 2010 were 22.5 percent in 2008. 3

Saving for retirement is a career-long process, which involves contributing to plan accounts and investing through bull and bear markets. An examination of the most recent previous downturn, which came after the bursting of the technology stock bubble, suggests that consistent long-term investment strategies benefited retirement savers. 4 The EBRI/ICI 401(k) database, the largest, most representative repository of information about individual 401(k) accounts, 5 shows that participants who stayed in the system and continued saving saw their accounts rebound significantly after the 2000 to 2002 market downturn. An analysis of a consistent set of 2.1 million EBRI/ICI database 401(k) plan participants who held accounts at the end of each year at least from year-end 1999 through year-end 2008 shows that between year-end 1999 and year-end 2002, the average account balance of this group fell 7 percent. 6 But, in the course of the next year, by year-end 2003, this group’s average account balance rose 32 percent. Further, the average account balance for these savers more than doubled from the market bottom (2002) through the end of 2007, and even at year-end 2008 their average account balance was 68 percent higher than at year-end 2002. Overall, this group’s average account balance increased on average 5.1 percent per year from year-end 1999 through year-end 2008, despite the bear markets. This highlights the value of diversification and ongoing contributions, which allow participants to take advantage of dollar-cost averaging—buying more when market prices are depressed. 7

In this written statement, the Institute expresses the following views, which are discussed below:

  • Decisions on how target retirement date funds are constructed and used in plans should remain with investment professionals and plan fiduciaries.
  • The use of proprietary funds in target retirement date funds is appropriate and in the interest of plans and their participants.
  • The retirement industry and regulators can and should do more to enhance understanding of target retirement date funds.

II. Decisions on how target retirement date funds are constructed and used in plans should remain with investment professionals and plan fiduciaries

Target retirement date funds have been the subject of extensive discussions since the end of 2008. 8 The consensus of the experts is clear that there is no single way to construct a target retirement date fund.  They also agree that employers are best positioned to decide which target retirement date funds are appropriate for their employees. Some critics, however, recommend that regulators should cap the maximum equity allocation a fund can hold at the target date, on the view that this might minimize investors’ losses at or near retirement. The Institute does not believe that the government should seek to regulate fund asset allocation.

Regulating asset allocation percentages or “glide path”

In calling for glide path standardization, some critics cited the dispersion of last year’s performance results in 2010 target retirement date funds as evidence of a problem and called for regulation of equity allocations to reduce volatility in fund returns. The government should not seek to regulate fund asset composition in reliance on this rationale.

Target retirement date funds are a type of balanced fund, and like all balanced funds, they invest in more than one asset class. All types of balanced funds—not just target retirement date funds—experienced wide dispersion in returns:

  • Morningstar data show that returns in Target Date 2000-2010 funds in 2008 averaged negative 22.5 percent and ranged from negative 3.6 percent to negative 41.8 percent.

 

  • Balanced funds categorized by Morningstar as Conservative Allocation had average returns of negative 18.6 percent, with returns ranging from positive 6.3 percent to negative 39.3 percent.

 

  • Balanced funds categorized by Morningstar as Moderate Allocation had average returns of negative 28.0 percent, with returns ranging from negative 1.7 percent to negative 54.2 percent.

These differences in returns arise not only from differences in asset allocation between equities and bonds, but also differences in asset allocation within equities and within bonds.

Target retirement date funds vary in how much equity they have, but all target retirement date funds have equity at and after retirement. This is because most financial analysts believe stocks offer attractive returns even after accounting for the volatility of their returns. While some critics recommend prescribing certain limits on the amount of equity that target retirement date funds can hold in order to reduce volatility of returns near retirement, this oversimplifies the analysis. Returns last year in target retirement date funds were not completely attributable to equity allocations − funds with similar equity allocations experienced different rates of returns. Indeed, many funds with low equity allocations experienced losses similar to, or even worse than, those of other funds with higher equity allocations. The 2008 returns reflected not only the amount of equity in a target retirement date fund’s portfolio but also the nature of the fund’s equity and bond investments, including the type of, and weights assigned to, equity and bond subclasses used by a fund.

Thus, simply regulating the total allocation to equities in target retirement date funds would not be sufficient to minimize differences in investment outcomes between funds with the same target retirement date. Instead, government would need to regulate comprehensively the entire composition of target retirement date funds, not just the percentage of equities. This level of involvement in a product design would be unprecedented, unjustified, and likely unsuccessful.

Investment managers and plan fiduciaries are in the best position to make decisions about the asset composition of target retirement date funds

Throughout their regulatory histories, the SEC and DOL consistently have avoided being highly prescriptive about the portfolio composition of long-term mutual funds under the Investment Company Act of 1940 or prescribing requirements on what would be a prudent plan investment under ERISA. They should not be asked to do so now. Investment managers and plan fiduciaries are in the best position to make these decisions.

The testimony at the June 18th SEC/DOL joint hearing from more than 10 witnesses representing firms that offer off-the-shelf or customized target retirement date portfolios demonstrated that providers design, test, and maintain target retirement date funds carefully based on economic principles and historic data to seek to achieve stated objectives for these funds. Information about how the design and underlying assumptions of one target retirement date mutual fund might differ from another is readily available in fund disclosure documents and throughout the process by which target retirement date funds are explained and presented to plan fiduciaries.

Under ERISA, plan fiduciaries must evaluate and approve a particular investment before including it in a plan menu. Some employers work with consultants when evaluating target retirement date funds, and some do the analysis in-house.

Witnesses representing plan sponsors and their consultants testified  at the June 18th SEC/DOL joint hearing that plan fiduciaries select target retirement date funds carefully with a view to the needs of their plans. In selecting target retirement date funds, employers may consider a number of factors, including whether or not the employer offers a defined benefit plan and whether or not the plan includes employer stock. Depending on the size of the plan and other factors, an employer may select an off-the-rack target retirement date fund or a custom-designed product. It is, and it should be, up to employers to select appropriate target retirement date funds for their plans. The differences in the glide paths used by different mutual fund families, and the differences in glide paths used in custom products (which can vary significantly from plan to plan, according to witnesses) allow target retirement date funds to meet different plan needs.

There is no “right” glide path for target retirement date funds or one “right” type of target retirement date fund for all plans. Decisions on how target retirement date funds are constructed by providers and how they are used in plans should remain with the persons best able to make those decisions—investment professionals and the fiduciaries of individual plans.

III. The use of proprietary funds in target retirement date funds is appropriate and in the interest of plans and their participants

Some have voiced concerns about target retirement date funds that use proprietary funds as underlying funds. These concerns, in our view, are misplaced. There are many reasons why a fund provider would determine that using proprietary funds is the best way to achieve a fund’s objective. In addition, there are regulatory hurdles that make it more difficult for mutual funds to use non-proprietary funds.

Target retirement date funds invest in multiple asset classes, ranging from domestic large and small cap stocks and international stocks to corporate and government bonds to cash. To avoid overlap between asset classes, some fund managers create proprietary funds consisting of pure asset classes as their underlying funds. Others select from among their existing funds with a view towards assembling underlying funds to meet the target retirement date fund’s objective. In both cases, managers using their proprietary funds have the benefit of knowing the investment policies of these funds and have easy access to their portfolio managers. Thus, they may reduce the costs of monitoring the portfolio allocation of the underlying funds to assure they continue to meet the target retirement date fund’s objectives.

Some have suggested that using underlying funds that were non-proprietary would produce better results, because this approach would allow the sponsor of the target retirement date fund to gain the benefits of specialization by picking “best of class” fund providers for each asset class. However, any benefits of specialization need to be weighed against the costs of transacting with unaffiliated firms and monitoring these relationships. 9

Legal factors also favor creation of target retirement date mutual funds comprised primarily of proprietary funds. Most target retirement date mutual funds operate as “funds of funds” that invest in a selection of underlying funds. The 1940 Act generally prohibits fund of funds arrangements unless they qualify for a statutory exception or apply for and receive an individual exemption from the SEC. Target retirement date funds comprised of proprietary funds can rely on the statutory exception in Section 12(d)(1)(G) of the 1940 Act. A provider organizing a target retirement date fund comprised of non-proprietary funds would have to seek an individual exemption from the SEC.

Section 12(d)(1)(G) was added to the 1940 Act by the National Securities Markets Improvement Act of 1996 (NSMIA) to codify exemptive orders previously issued by the SEC for proprietary fund of funds arrangements designed for retirement investors. 10 By codifying the exemptions, Congress eliminated the need for a fund group to seek an individual exemptive order to create a fund of funds arrangement consisting of proprietary funds.

NSMIA also added new section 12(d)(1)(J) to the Act to authorize the SEC to issue additional exemptive relief for fund of funds arrangements not otherwise permitted by the Act. The House Report accompanying NSMIA stated that the SEC was expected to “use this additional authority to adopt rules and process exemptive applications in the fund of funds area in a progressive way as the fund of funds concept continues to evolve over time.”  11 The SEC has used this authority in the past, among other things, to provide case-by-case exemptions for fund of funds arrangements involving non-proprietary funds. 12

Fund managers have no incentive to use poorly performing proprietary funds

Some target retirement date fund critics imply that the use of proprietary funds in target retirement date funds creates an incentive to use poorly performing and expensive funds.

That contention defies common sense. Plan sponsors and participants demand funds with good performance. Thus, if a mutual fund’s manager loaded up a target retirement date fund with poor-performing funds, the manager would be putting itself at a competitive disadvantage.

There is also no basis to the charge that target retirement date funds are overly expensive. The asset-weighted average expense ratio for target retirement date mutual funds was 0.66 percent of assets as of May 2009; the Institute’s previous research has shown that the comparable average for stock funds was 0.84 percent at year-end 2008; for bond funds, 0.63 percent. 13

The use and expenses of proprietary funds is fully disclosed and transparent

The use of proprietary funds in mutual fund target retirement date funds, including their expenses, is fully disclosed. In 2006, the SEC adopted a specific requirement that all fund of funds disclose an aggregated expense ratio for underlying funds in their prospectuses as a required line item in the fee table. 14 Fund prospectuses are required to place the fee table near the front of the prospectus. The names of the underlying funds are identified in a target retirement date fund prospectus, and plan sponsors, consultants, and others seeking additional information about underlying proprietary mutual funds easily can obtain it in the prospectuses and statements of additional information of those funds.

Target retirement date mutual funds are subject to the same comprehensive regulation under the 1940 Act that applies to all mutual funds and, as explained above, must comply with the 1940 Act’s strict rules relating to fund of funds structures. For example, mutual fund boards of directors (most of which have a majority or more of independent directors) have a fiduciary duty to assure that funds operate in the interests of their investors, including duties to assure that funds are not overcharged for services to the fund provided by its investment manager. The 1940 Act’s fund of funds rules limit the sales charges and service fees that can be charged and generally have the effect of assuring that fund investors are not charged twice for the same service.

While the investment adviser of a target date mutual fund has fiduciary duties under the securities laws as described above, the adviser is not treated as an ERISA fiduciary under ERISA’s statutory framework.  Congress exempted from ERISA the investment adviser of a mutual fund registered under the Investment Company Act of 1940. The legislative history of ERISA makes clear that the Congressional drafters recognized that the securities laws already provide the kind of protections to mutual fund investors that ERISA would create for pension plans. 15 This division of regulatory responsibility has worked well for more than 35 years.

We understand that one company filed an opinion request with the DOL challenging the availability of the exemption in connection with target retirement date funds. Treating the adviser of a target retirement date fund as an ERISA adviser would be incorrect as a matter of law, would upset 35 years of plan regulation, 16 and would be bad public policy. A target retirement date fund provider does not offer investment advice – it offers an asset allocation mutual fund that becomes more conservative over time based on a fully disclosed glide path.  Plan sponsors who add a target retirement date fund to a plan lineup and participants who select the fund for their accounts are making decisions to buy that particular asset allocation product. Like all investors in all mutual funds they expect the fund to follow the investment objectives, including the glide path, it has described. Target retirement date fund managers do not offer personalized advice and therefore are not ERISA fiduciaries. Moreover, there is no gap in protection here—target retirement date mutual funds and their managers are subject to robust regulation under the securities laws. In addition, when target retirement date funds are used in ERISA plans, participants have the extra protection provided by plan fiduciaries who are subject to duties of prudence and care in selecting and monitoring target retirement date funds used in plans.          

Plan sponsors can choose whether or not to use target retirement date funds offered by the plan’s recordkeeper

Finally, some critics allege that target retirement date fund providers that provide recordkeeping services to retirement plans limit plan sponsors’ target retirement date fund options to their proprietary funds. That is simply not true. A 2008 survey by Financial Research Corporation found that nearly three-quarters of all surveyed recordkeepers indicated they offer non-proprietary target retirement date fund series on their platforms, and two-thirds of such firms with proprietary target retirement date funds make non-proprietary families available to plans. 17 The survey covered 11 defined contribution plan recordkeepers representing more than $600 billion in assets and nearly 62,000 plans in early 2008. 18

IV. The retirement industry and regulators can and should do more to enhance understanding of target retirement date funds

Plan sponsors and participants have a number of good sources of information about target retirement date funds. On September 23, 2009, the Institute hosted a one-day workshop on Enhancing Understanding of Target Retirement Date Funds to explore the information available to plan sponsors and participants and consider how to enhance understanding of target retirement date funds. 19 The workshop demonstrated that employers have available both summary and detailed information about target retirement date funds and that they make use of this information in selecting and monitoring funds for their plans in the fiduciary process by which they carry out their plan responsibilities.

With respect to participants, in addition to the SEC-required disclosure documents, many other materials are provided and available about target retirement date funds. 20 Plans typically provide user-friendly “fact sheets” about plan investment options, including any target retirement date funds used in the plan. Working with plan recordkeepers, employers routinely organize meetings with employees to present and explain information about a plan’s target retirement date funds, and develop and make available effective written educational communications about these investment options. Providers of target retirement date funds offer a wide range of materials about target retirement date funds on their websites, including tools that allow participants to see graphically and to follow the fund’s glide path, and more extensive materials developed primarily for plan sponsors explaining the design and assumptions of the providers’ target retirement date funds.

Because target retirement date funds represented a significant innovation in 401(k) and IRA investing, they also received a great deal of attention over the past five years in the trade press available to plan sponsors and the popular press directed to the public. Due to the availability of a variety of sources of information, the Institute believes that the target retirement date fund concept, generally, was understood by most target retirement date fund investors and that employers and participants appreciated that an investor in a target retirement date fund could lose money, depending on market events, including at or near retirement.

Nevertheless, there are gaps in public understanding of target retirement date funds. The severity of market events in 2008 and the strong interest of policymakers in looking at target retirement date funds provide an opportunity for the industry to see if it can do better to enhance investors’ understanding of these products. The Institute believes that more can be done to focus attention on key pieces of information about target retirement date funds, but that the solution does not lie in changing how target retirement date funds are named.

Key information about target retirement date funds—the Institute’s Principles to Enhance Understanding of Target Date Funds

The Institute formed a working group of its members in early 2009 to assess how understanding of target retirement date funds could be enhanced. The Institute’s working group consists of members from a broad range of members firms, representing more than 90 percent of target retirement date mutual fund assets. The group identified five key principles – Principles to Enhance Understanding of Target Date Funds – all target retirement date funds should prominently communicate to investors. Although this information may already be included in prospectuses (if a target retirement date fund is a mutual fund) and other investor communications, the goal of the Principles was to distill down key pieces of information an investor should see in a prominent display.

Under the Principles, funds will communicate prominently:

  • the relevance of the “target date” used in a fund name, including what happens on the target date;
  • the fund’s assumptions about the investor’s withdrawal intentions at and after the target date;
  • the specific group for whom the fund is designed;
  • an illustration and explanation of the glide path the target retirement date fund follows highlighting the asset allocation at the target date and at the point at which the glide path is expected to reach its most conservative asset allocation, and if a fund manager has the flexibility to deviate from the glide path, the disclosure should state this and include the applicable parameters; and
  • a statement, added to the existing risk disclosure, that the risks associated with a target retirement date fund include the risk of loss, including losses near, at, or after the target date, and that there is no guarantee that the fund will provide adequate income at and through the investor’s retirement.

The working group attached a mock-up fund sheet to the Principles illustrating how the Principles may be used. (The Principles and mock-up fund sheet are attached and available at www.ici.org/pdf/ppr_09_principles.pdf).

The working group designed the Principles to be used by target retirement date funds organized as mutual funds or other pooled products, such as collective trusts and insurance company separate accounts, on a voluntary basis. Should the SEC or DOL decide to develop new disclosure rules for target retirement date funds, we recommend that they use an approach similar to the one we applied to the Principles. The disclosure should focus on key information that should be prominently conveyed. Any disclosure rules should apply to all target retirement date fund products. For example, if the SEC determines to propose and adopt additional disclosure requirements for target retirement date mutual funds, the DOL should likewise propose and adopt similar rules that would apply to target retirement date funds that are not mutual funds.

Changing or regulating fund names would not enhance understanding of the funds

Some critics suggested changing funds’ naming conventions to address concerns that investors did not understand target retirement date funds. We disagree. All target retirement date funds currently use a target date—an anticipated retirement date—in a fund’s name. This is a date investors can easily understand. This is a key event that is taken into account in the design of all target retirement date funds: On the retirement date, the fund anticipates that an investor will stop making new contributions to the fund and move from an accumulation stage to the distribution stage. We oppose any proposals that suggest eliminating this important point of reference from a target retirement date fund name. This date imparts important information that an investor easily can apply to his or her own situation, and it would be a disservice to investors to eliminate this information from funds’ names.

Most other ideas for “re-naming” funds attempt to elevate another single piece of information about a target retirement date fund, such as the date at which the fund fixes its asset allocation. This change would not assure better understanding of target retirement date funds, because an investor should understand a number of things about a fund. All of this information is important and all of it simply cannot be conveyed through a name.

Some have suggested instead that funds should be labeled “to retirement” or “through retirement.” This distinction is artificial and of no value to an investor, because all funds can be used to take investors through retirement. While it is important for investors to know whether a fund continues to reduce equity exposure after retirement and when the asset allocation becomes fixed, it is not feasible to place this information in a fund name. And this is not the only information an investor needs. Accordingly, we believe the Institute’s Principles are the best way to enhance the delivery of critical information to investors.

V. Conclusion

We applaud the Committee for examining target retirement date funds. We share the commitment of the Committee to assure that the interests of plans and their participants are protected in connection with the use of target date funds in retirement plans and that understanding of these useful investments is enhanced. The Institute and our members pledge to work with the Committee, regulators and others in the retirement industry to enhance investors’ understanding of these important products.

Please find more information on Target Date Retirement Funds at ICI's Resource Center: http://www.ici.org/trdf.

endnotes

 1 The Investment Company Institute (ICI) is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). ICI seeks to encourage adherence to high ethical standards, promote public understanding, and otherwise advance the interests of funds, their shareholders, directors, and advisers. Members of ICI manage total assets of $11.2 trillion and serve about 90 million shareholders. ICI’s mutual fund members manage nearly half of IRA and 401(k) plan assets and advocate policies to make retirement saving more effective and secure.

 

 2 For discussion of asset returns in 2008, see Brady, Holden, and Short, The U.S. Retirement Market, 2008, ICI Fundamentals, vol. 18, no. 5 (June 2009), available at www.ici.org/pdf/fm-v18n5.pdf.

 3 Return reported is the simple average of all share classes of the “Target Date 2000-2010” category as reported by Morningstar. Most funds in this category are 2010 funds.

 4 In 1999, total U.S. retirement market assets temporarily peaked at $11.8 trillion. Because of the bursting of the tech bubble and the terrorist attacks on September 11, 2001, the U.S. stock market entered a multi-year downturn. By year-end 2002, U.S. retirement market assets had fallen to $10.5 trillion, an 11 percent drop from the 1999 peak. (Although this was a significant decline, it was not as extreme as the overall market downturn–the S&P 500 total return index fell 37.6 percent over the same period. We attribute this difference to diversification and ongoing contributions, which tempered the decline in retirement savings.) Retirement assets rebounded to $12.5 trillion by year-end 2003. See Investment Company Institute, The U.S. Retirement Market, First Quarter 2009, ICI Fundamentals, vol. 18, no. 5-Q1 (Aug. 2009), available at www.ici.org/pdf/09_q1_retmrkt_update.pdf.

 5 The year-end 2008 EBRI/ICI 401(k) database includes 24.0 million 401(k) plan participants (or 48 percent of the estimated 49.8 million active 401(k) participants in all private-sector 401(k) plans), in 54,765 plans (12 percent of all 401(k) plans), holding $1.092 trillion in assets (47 percent of the $2.3 trillion in total assets held by all private-sector 401(k) plans). Target date fund assets represent 6.6 percent of the assets in the year-end 2008 EBRI/ICI 401(k) database. (In the EBRI/ICI 401(k) database, “funds” include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled investment product primarily invested in the security indicated.) For more information on the EBRI/ICI 401(k) database, see Holden, VanDerhei, and Alonso, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2008, ICI Perspective, vol. 15, no. 2, and EBRI Issue Brief, no. 335, Investment Company Institute and Employee Benefit Research Institute (Oct. 2009), available at www.ici.org/pdf/per15-02.pdf.

 6 For more information on the account balance experience of the consistent group of participants who held accounts at the end of each year from 1999 through 2008, see Holden, VanDerhei, and Alonso, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2008, supra.

 7 The EBRI/ICI 401(k) database was also used to analyze a consistent group of participants who held accounts each year at least from year-end 2003 through year-end 2008. The average account balance among this consistent group of 6.0 million 401(k) plan participants suffered a 24.3 percent drop during 2008’s bear market. Nevertheless, these consistent participants saw their average account balance increase at an annual average rate of 7.2 percent over the five years, even after the 2008 losses. Changes in account balances reflect ongoing worker contributions, employer contributions, investment gains and losses, and loan and withdrawal activity. See Holden, VanDerhei, and Alonso, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2008, supra.

 8 For example, the SEC and DOL held a joint hearing on target retirement date funds on June 18, 2009, at which more than 30 witnesses testified. Karrie McMillan, the Institute’s General Counsel, testified for the Institute. Ms. McMillan’s testimony is available at www.ici.org/pressroom/speeches/09_target_fund_tmny.

 9 This is not a tradeoff that is unique to target retirement date funds. As laid out in his seminal 1937 article (“The Nature of the Firm,” Economica, 4(16) 386-405), Ronald Coase posited that firms exist because transaction costs make it more efficient to produce some products completely within a firm rather than to purchase intermediate products, or inputs, through market transactions. The tradeoff between the benefits of specialization and the costs of market transactions defines the limit of the firm; that is, it defines which inputs are produced internally and which inputs are purchased in the marketplace.

 10 See Vanguard Special Tax-Advanced Retirement Fund, Investment Company Act Release No. 14153 (Sept. 12, 1984) 49 Fed. Reg. 36582 (Sept. 18, 1984) (notice), Investment Company Act Release No. 14361 (Feb. 7, 1985) (order) (“1985 Vanguard Order”); T. Rowe Price Spectrum Fund, Investment Company Act Release No. 17198 (Oct. 31, 1989) 54 Fed. Reg. 47010 (Nov. 8, 1989) (notice), Investment Company Act Release No. 17242 (Nov. 29, 1989) (order) (“1989 T. Rowe Price Order”); Vanguard STAR Fund, Investment Company Act Release No. 21372 (Sept. 22, 1995) 60 Fed. Reg. 50656 (Sept. 29, 1995) (notice), Investment Company Act Release No. 21426 (Oct. 18, 1995) (order) (revising conditions on the 1985 Vanguard Order); T. Rowe Price Spectrum Fund, Investment Company Act Release No. 21371 (Sept. 22, 1995) 60 Fed. Reg. 50654 (Sept. 29, 1995) (notice), Investment Company Act Release No. 21425 (Oct. 18, 1995) (order) (revising conditions on the 1989 T. Rowe Price Order). The funds that obtained these exemptions were designed as asset allocation funds for retirement investors but were not target retirement date funds. When target retirement date mutual funds were introduced, Section 12(d)(1)(G) existed to streamline the regulatory process for fund families in organizing these funds.

 11 See H.R. Rep. No. 622, 104th Cong., 2d Sess., at 43-44 (1996) (H.R. Rep. No. 622).

 12 See Schwab Capital Trust, Investment Company Act Release No. 24067 (Oct. 1, 1999) 64 Fed. Reg. 54939 (Oct. 8, 1999) (notice), Investment Company Act Release No. 24113 (Oct. 27, 1999) (order).

 13 See Collins, Trends in the Fees and Expenses of Mutual Funds, 2008, ICI Fundamentals, vol. 18, no. 3 (April 2009), available at www.ici.org/pdf/fm-v18n3.pdf.

 14 See 71 Fed. Reg. 36640 (June 27, 2006) (Fund of Funds Investments; Final Rule).

 15 See ERISA Conference Report, 93-406 (“Since mutual funds are regulated by the Investment Company Act of 1940 and, since (under the Internal Revenue Code) mutual funds must be broadly held, it is not considered necessary to apply the fiduciary rules to mutual funds merely because plans invest in their shares.”)

 16 The Department of Labor’s position on this issue has been consistent since 1975. See Interpretative Bulletin 75-3, 29 C.F.R. § 2509.75-3.

 17 See Financial Research Corporation, Future Outlook for Lifecycle Funds: Insights into Emerging Trends and Growth Opportunities, Boston, MA: Financial Research Corporation, May 23, 2008.

 18 See id.

 19  The workshop participants included a broad range of experts, including target retirement date fund providers, plan sponsors and plan consultants. A webcast recording of the workshop is available at  www.ici.org/events/highlights/conf_09_targetdate.

 20 Many of the materials available to 401(k) participants are subject to regulatory standards applicable to advertising. Mutual fund advertising materials intended for retail investors are reviewed by the Financial Industry Regulatory Authority (FINRA). Mutual fund advertising materials also must comply with SEC and FINRA requirements designed to assure these materials are not misleading.