Given the popularity of target date funds (“TDFs”) in many 401(k) plans, the Department of Labor (“DOL”) recently posted guidance to help fiduciaries of 401(k) plans select and monitor TDFs. TDFs are also often designated as a 401(k) plan’s qualified default investment alternative to be used by participants who fail to make an investment election for their account balances.
TDFs are designed to hold a mix of stocks, bonds and other investments and are attractive to individuals with a particular retirement date in mind. The name of the TDF often refers to its target retirement date. TDF’s frequently operate to change the mix of investments to be more conservative as the investor approaches the target retirement date. Nevertheless, TDFs with the same target date often have different investment strategies and risks.
Most 401(k) plans seek to rely on Section 404(c) of ERISA so that the fiduciaries are not liable for losses suffered by participants resulting from their own investment choices. Nevertheless, the relief provided by Section 404(c) of ERISA requires that the fiduciaries prudently select and monitor the investment choices offered under the 401(k) plan. The DOL guidance is a useful tool to help satisfy a fiduciary’s obligation to select and monitor TDFs.
According to the DOL guidance1,the following steps should be taken in order to properly select and monitor a TDF:
- Establish a process for comparing and selecting TDFs;
- Establish a process for periodic review of the TDFs that have been selected;
- Understand the investments in the TDF such as the allocation of different asset classes and how these will change over time;
- Review the fees and investment expenses for the TDF;
- Consider whether a custom or non-proprietary TDF would be a better fit for the plan;
- Develop effective employee communications so participants receive appropriate information about the TDFs;
- Utilize available sources of information to evaluate the TDF; and
- Document the process for selecting and monitoring the TDF.
The DOL guidance on TDFs reinforces the need to periodically monitor the investment choices available under a 401(k) plan; not just the TDFs. In addition, as noted in the guidance, documenting the process in which investment choices are monitored and reviewed is essential in order to effectively limit liability to fiduciaries for losses suffered as a result of allowing “poorly-performing” fund choices to remain in a 401(k) plan.