Target Date Funds – Getting Questions? Be Prepared

Target Date Fund Questions

Getting Questions About Your Plan’s Target Date Funds? Be Prepared. Plan sponsors, brace yourselves. If you aren’t already, you might soon be getting questions from participants — especially younger ones — who are concerned about the performance of their target date funds (TDFs).

According to this article from CNBC, about 80% of 401(k) plans offer target date funds (TDFs) (from an Investment Company Institute (ICI) study), and assets in target-date mutual funds weighed in at around $1.16 trillion as of the end of January (from Morningstar). In short, TDFs are darned popular, and they’re used by many employers as the qualified default investment alternative (QDIA) in their retirement plans. In laymen’s terms, that means TDFs are often selected to serve as the investment option auto-enrolled participants are defaulted into.

There is a common perception that TDFs are “safer” investment options because they offer a diversified mix of investments that are gradually adjusted to become more conservative to reduce risk as a participant gets closer to retirement. Generally, TDFs start out more heavily invested in stocks, then their asset allocation shifts to so-called less risky investments such as bonds as an individual approaches their anticipated, or “target” retirement date. However, that’s a big reason why younger participants might approach you with some serious questions about their performance.

You see, stocks didn’t do so well to start out the year, particularly in February. There was a lot of volatility in the stock market, and that’s likely to negatively impact the performance of your plan’s TDFs, particularly those with higher stock allocations. Thus, younger investors might wonder what’s up since their TDFs likely have heftier stock exposures, and these funds may have experienced a steeper drop in performance than most participants may be comfortable with. They’re not the only ones. Even some investors who are closer to retirement saw declines in their TDF performance. According to CNBC, Fidelity’s Freedom 2020 Fund took a 6% dive between January 26 and February 8.

So if and when you get a barrage of questions from your participants about what the heck happened in their TDFs in Q1, what do you tell them? Well, for starters, tell them to take a deep breath. Then, as we’ve written before, remind them not to panic. For most, investing for retirement is a long game. While the markets may experience some volatility for the remainder of 2018 and beyond, what happens in the next 6 months to a year isn’t going to have much of an impact on participants who have 20-plus years — or even longer — until their planned retirement date. In other words, encourage them to stay the course, continue to save, and keep their eyes on the prize: a long, fulfilling, financially secure retirement.

In addition, help your participants understand the benefits and risk profiles of the target date funds in the plan by educating them about how TDFs work, how the asset allocation shifts over time, and the differences in the asset classes of the underlying funds (i.e., stocks are riskier than bonds, and each fund has a different allocation depending on the participant’s age and expected retirement date). It’s also a good idea to remind participants that if they have other investments outside of the plan, i.e., in an IRA or self-directed portfolio, they should check their allocation against that of the TDF they’re invested in to ensure they’re not exposing themselves to unnecessary risk by being overweight in a particular asset class, for example.

Finally, be transparent. If your employees are asking questions about how you chose the TDFs in the plan and why you believe they’re suitable, tell them. It’s your fiduciary duty to ensure the funds are a fit for your plan demographic and that they’re meeting your participants’ needs. Ideally, you should have a written plan as to how you chose the funds, and you should be able to provide this information, as well as any fund benchmarking data, to anyone who asks — whether it’s your participants or a Department of Labor (DOL) auditor — at a moment’s notice.

In short, be aware that you may start receiving questions about your plan’s TDF performance from participants who are concerned about declines due to the recent volatility in the markets. Keep a level head, be prepared, and be proactive about communicating and explaining the benefits of TDFs while reminding participants, especially younger ones, not to let near-term hiccups in their investment performance impact how they think about their long-term retirement goals.

Robyn Kurdek

Robyn Kurdek

Freelance writer with nearly 2 decades of financial industry experience, with niche expertise in the defined contribution (DC) industry. I also have defined benefit (DB) plan knowledge. I write all types of content for retirement plan participants, sponsors and advisors, including web copy, newsletters, white papers, fact sheets, blog posts, financial wellness articles, and more. "I speak DC."
Robyn Kurdek
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