When it comes to discussing or selecting investments for their 401(k) plans, many HR and benefits professionals get intimidated. It’s of their area of expertise, as they focus on people and behavior, and the investment community does not make investments easy to understand, intentionally or unintentionally. But if HR professionals are intimidated, imagine how employees and participants in 401(k) or defined contribution (DC) plans feel. As Susan Power at Fidelity notes, “If the discussion about target funds are hard for HR professionals to understand, imagine how their employees feel.”
While it’s unlikely that HR professionals and DC plan participants will ever get a Ph.D. in investing, it’s really not necessary. But when it comes to Target Date Funds (TDFs), the fastest growing investment in DC plans and the most popular managed investment or balanced fund, it’s really important to get it right and have a basic understanding of how they work and what’s best for the company and individuals.
Let’s start with why managed investments and TDFs in particular have become so popular and important in corporate-sponsored retirement plans. Most employees do not have the knowledge or inclination to manage their own investments or portfolios. It takes a basic understanding of which investments are good or performing, which changes from quarter to quarter; figuring out the right mix of assets to weather down markets and participate in good markets; an understanding of all the fees charged by the various investments; and then periodically re-balancing as certain investments take a larger share of the pie during certain market cycles.
The best analogy is trying to teach someone how to repair their car: While some people enjoy it (witness the growth of Morningstar), most would prefer to just drop their car off with a mechanic. TDFs allow plan participants to allocate most if not all of their investment decisions to a professional who manages a larger pool of money for many people, making all the decisions necessary while constantly re-balancing. No wonder target date funds have ballooned to over $700 billion in DC plans and nearly two-thirds of recently hired 401(k) participants invested in a balanced fund in 2013 compared to one-third in 1998, according to EBRI. Recent hires have more than three-quarters of their money invested in balanced funds like TDFs, accounting for 90% of their 401(k) account in 2013.
(For full article Published in HR Magazine go here.[HR Magazine PDF Download] )
