Target Date Funds (TDFs) are simple by design—at least from the perspective of the plan participant. The participant decides when he or she will retire, selects a fund that targets this retirement year (or one close to it), and then forgets about it. The fund does the rest, reallocating the investments in the fund to become more conservative as the targeted retirement date approaches. From the perspective of the plan fiduciary, however, prudently selecting and monitoring a particular target date or lifecycle fund to use as a Qualified Default Investment Alternative (QDIA) or as a plan investment option is a more complex process. The plan fiduciary must investigate and assess a number of features of the available TDFs in making its decision as part of a thorough and welldocumented process. The Department of Labor (DOL) recently issued guidance designed to help plan fiduciaries identify some of the key relevant factors for TDFs. We suggest that plan fiduciaries incorporate this guidance into their plans’ Investment Policy Statements (IPS) and prudent selection processes.
The DOL guidance, “Target Date Retirement Funds— Tips for ERISA Plan Fiduciaries” is the latest of several DOL initiatives to help plans and participants better understand TDFs. As the performance differences among the 2010 class of TDFs during the market www.drinkerbiddle.com 5 Plan Sponsor Newsletter | April 2013 gyrations of 2008-2009 highlighted, even target date funds with the same target date may vary significantly in their investment philosophy and strategies. The recent DOL guidance is intended to help fiduciaries ask the right questions to understand the funds they are reviewing, and to select prudent TDFs for their plans.
The DOL “Tips”
The “Tips” explain some of the basic facts about TDFs, including the fund’s so-called “glide path.” The glide path is the projected investment plan for changing the asset allocation over time. A “to” fund is intended to reach its most “conservative” asset allocation strategy at or near the target date, while a “through” fund is not intended to reach its most conservative asset allocation strategy until some years after the target date. Either of these approaches might have advantages for a particular plan, but the plan fiduciary has to understand the differences and purposefully select one or the other. DOL suggests that fiduciaries consider some related issues in making this choice, such as plan demographics and whether the participants are covered by a defined benefit plan.
Other relevant factors identified by the guidance include:
- Investment strategy—separate from “to” vs. “through,” do you understand the principal strategies and risks of the fund and its underlying assets? Have you considered part performance and other standard investment metrics?
- Fees and expenses—do you understand the fees associated with the investment? If there are administrative service payments, such as 12b-1 fees, do you understand who is receiving them and for what services?
The guidance also advises fiduciaries to understand the differences between “proprietary” and “non-proprietary” funds, and to inquire about the availability of “custom” TDFs. A proprietary TDF is one in which the underlying investments are funds offered by the same investment provider offering the TDF, whereas non-proprietary TDFs utilize funds from other investment providers. A custom TDF is one in which the underlying investments are the core funds from the plan’s own investment menu. All of these product variations are factors fiduciaries should consider, but deciding which is prudent for your plan is an individualized decision taking into account all of the other relevant factors, from fees to glide path.
Finally, the guidance suggests that fiduciaries consider reviewing their plan’s participant communications to ensure participants have the information they need to understand the TDFs available to them, and to ensure compliance with the participant disclosure regulations.
When DOL issues guidance on how to prudently select an investment option, it is advisable to review the guidance and incorporate it into your plan’s investment policy statement and fiduciary process. Your Drinker attorney will be happy to assist you in this process.