Target Date Fund Selection
In the June Retirement Supplement of SHRM’s HR Magazine, in time for their national conference, 401kTV will be publishing a comprehensive article about best practices in selecting and monitoring target date funds (TDFs), which has become the single most important and popular investment option for defined contribution (DC) plans. But with most of the top TDFs offering only off-the-shelf options, with no ability for plans to customize, there’s a real conundrum for plans that might reject a fund in their lineup but discover that the same fund represents a significant part of their TDF.
TDFs are fundamentally different than other investments in a DC plan lineup because they include a basket of other funds. Their analysis therefore includes not only reviewing the ingredients or underlying investments, but also how much risk they take as the fund gets closer to the targeted retirement date and how they allocate between different types of investments like stocks and bonds.
So what happens when a DC plan investment committee dutifully following their investment policy statement (IPS) decides that a fund is no longer meeting the requirements of the IPS and removes it from their plan and then determines that the same fund is not only part of the plan’s TDF but also has a significant amount of the assets? Worse than not having an IPS, which is not required but highly recommended, is not following it. Is the plan breaching its duty to act as a prudent expert?
Larger plans are moving to custom funds where they have more flexibility in selecting the ingredients. With the advent of collective trusts (CITs), there’s much more flexibility than with mutual funds. But one solution starting to gain traction is using a firm or an advisor to create a glide path and asset allocation model but then deploy the funds in the plan as part of their investment menu. That way, if a fund is removed, it’s also removed from the custom TDF. These funds are a bit more complicated to manage and the plan sponsor needs to be sure that the firm or advisor is capable but it does solve for a sticky issue.
