RFP FOR TARGET DATE FUNDS? IT’S A GOOD IDEA – ASK THE LAWYER #2
RFP for target date funds? It’s a good idea. “I don’t need to worry about target date funds, do I? The Department of Labor has approved them.” When plan fiduciaries ask me to confirm this, it is really a sign that although target date funds (“TDFs”) may be very popular, they are widely misunderstood. TDFs have to be prudently selected and have reasonable fees in order to satisfy the Department of Labor’s default investment (QDIA) safe harbor-which is the “approval” referred to in the question- or be offered at all, and analyzing them isn’t easy. They are all invested and run differently, with varying proportions of equity and fixed income investments at different ages and different assumptions about when participants will draw down on their accounts. There are “off the shelf” and custom target date funds to be considered.
Participants are suing plan fiduciaries over their selection of these funds, so how can fiduciaries protect themselves? One way is to conduct a separate RFP for target date funds. A just-released study by Alliance Bernstein and BrightScope shows a 16% increase in the use of TDFs not offered by the plan’s recordkeeper. And an RFP can make sense even if a potential recordkeeper limits fund choices because fiduciaries should reject a recordkeeper whose only fund offerings are sub par or have excessive fees.
How would this RFP work? Though the questions would differ, it would not be very different from the recordkeeper or adviser RFPs fiduciaries are already familiar with. Help from an investment advisor is recommended.
Here are some issues to consider:
- Obtain information about the firm managing the funds, including its experience, compliance procedures and its procedures for managing conflicts of interest. (Do your own independent check for disciplinary action and lawsuits.)
- Include questions to understand the glide path and all direct and indirect fees. Recognize that target date funds typically have multiple levels of fees. Ask for a breakdown of the expense ratio. Ask the provider to identify how its funds differ from competing funds.
- Include questions to identify asset classes of the funds (are there investments other than equity, fixed income and cash?), procedures for monitoring underlying funds and managers, and when rebalancing occurs.
- Include questions to evaluate how the funds have performed in up and down markets and in comparison to competing funds.
- Request sample communications.
- If the plan is large enough to consider a custom target date fund, obtain information about any custom fund services, start-up process and interaction with trustees and recordkeepers. Recent litigation has highlighted custom funds allegedly overinvested in real estate and private equity investments, so know the provider’s policy re alternative investments.
These are just some of the questions prudent fiduciaries should be asking about target date funds. Your advisor can help to review the provider’s assumptions and processes. More helpful information about fiduciary duties when selecting target date funds has also been made available by the Department of Labor in its release “Target Date Retirement Funds-Tips for ERISA Plan Fiduciaries.”
by Carol Buckman
Carol I. Buckmann is widely known as an outstanding and innovative benefits lawyer, who deals with some of the foremost issues in ERISA, including pension plan compliance, fiduciary responsibilities, and investment fund formation. firstname.lastname@example.org