What past-performance benchmarks do 404a-5 disclosures use for target-date funds?

[Peter Gulia]

For a retirement plan that provides participant-directed investment, an administrator provides information to meet ERISA’s disclosure requirements. This includes comparing a fund’s or other investment alternative’s past performance to “an appropriate broad-based securities market index[.]” For example, many fiduciaries compare a fund one finds to have the investment goals and strategies of a US small-capitalization value fund to the Russell 2000 Value Index or the CRSP US Small Cap Value Index.

In SECURE 2022 § 318, Congress directs the Labor department to publish a rule to let a plan’s administrator use for “a designated investment alternative that contains a mix of asset classes” a benchmark that is a blend of broad-based securities market indices, proportioned to follow the target-date, asset-allocation, or balanced fund’s investments in asset classes.

Considering the Office of Information and Regulatory Affairs’ most recent Unified Agenda of Regulatory and Deregulatory Actions, it seems unlikely the Labor department will complete, or even propose, a rulemaking by Congress’s December 2024 due date.

For plan administrators that rely on a recordkeeper or third-party administrator to assemble rule 404a-5 disclosures comparing an investment alternative’s past performance to an index’s past performance, what have the service providers been doing?

Have some followed what Congress permits, setting up a custom benchmark built from applying each underlying asset class’s index in the portions the target-date fund declares as its target allocations?

If not, what benchmark does a 404a-5 disclosure use for a target-date fund?

(I’m aware some investment funds use custom benchmarks for securities law disclosures; I’m seeking what retirement plans do in ERISA 404a-5 disclosures to participants.)