According to a survey by SEI with 230 defined contribution (DC) plan sponsors in late 2015 with between $25 million and $5 billion, the use of TDF’s (target date funds) offered by the plan’s record keeper has dropped to just 50%, even lower for larger plans. The unbundling of TDF’s from record keeper services, like what happened to other investments a decade ago, is just beginning.
Though 90% of the plans surveyed offered TDF’s , 58% would like to see more of their participants use them as less than 50% of participants invest in these professionally managed investments at 73% of the companies – even fewer for smaller plans.
Some solutions include re-enrollment with TDF’s as the default which is being considered by 42% of the respondents to the SEI survey.
Another way to get more participation in TDF’s is through choice architecture deployed recently by American Airlines which redesigned their investment menu after the merger with US Air. TDF’s are not just another investment option – it’s more about whether employees want to have a professional manage their investments. If not, they can select from a line-up of 10 funds. According to Columbia professor Sheena Iyengar, plans with fewer funds enjoy better participation and participants make better decisions.
What’s driving this move away from proprietary TDF’s? In 2013, the DOL issued guidance about how DC plan sponsors should select and monitor their TDF which has more to do with the fit with a company’s employee population as well as other investment criteria and nothing to do with whether it was bundled with record keeping services.
Some experts are now recommending that a plan sponsor conduct a TDF search before they pick a new record keeper as the TDF may have a greater impact on retirement readiness than the provider.
