Author: Paul A. Carl, CHSA, CPFA™Vice President, Retirement Plan Consulting, Registered Representative
Retirement Meditation #12 addressed default investment options, including the age-based asset allocation fund—better known as the target date fund. Target date funds were invented in the early 1990s and exploded in popularity following the PPA1 and the DOL’s QDIA regulation. Current estimates of target date fund availability in retirement plans range from 85% to as much as 98% depending on the study.
Target date fund propagators heavily promoted the simplicity for the employer and the employee. For employers, the target date fund represented a package of asset allocated funds initially available in 10-year increments and ultimately offered in 5-year increments. The participant could simply pick the fund that was closest to the expected retirement date. Recordkeepers jumped on the target date fund bandwagon by offering discounts on recordkeeping services for plan sponsors offering their proprietary target date fund solution. Employers had found “heaven” …or did they?
Soon, it became apparent that target dates funds were much more complex than originally thought. Employers offering the recordkeeper’s proprietary target date fund solution still had to uniquely evaluate the performance and other key factors of the target date fund solution. A rising equity market led many target date fund providers to stretch their “glidepaths” to create higher equity allocations. Chasing investment returns became discussions centered upon “to retirement” and “through retirement” glidepaths. The matter became so complex so quickly that the DOL published “Target Date Retirement Funds—Tips for ERISA Plan Fiduciaries” in 2013.
Throughout, the fiduciary responsibility of plan sponsors and their fiduciaries remains unchanged. Evaluate not only target date fund performance and key factors, but also consider employees’ aggregated ages and behaviors as well as other key data such as:
“What’s the average and median age of my workforce?”
“Do my employees take distribution at retirement or leave their funds in the plan?”
Most importantly, create and follow a process for target date fund evaluation. Document that process. Evaluate that process. Rinse and repeat.
Do you have a process to evaluate target date funds?
1The PPA is the Pension Protection Act of 2006.
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