A target date fund is relatively common place in the 401k plan arena. Most plans offer them as an investment option to the plan participants and some plan sponsors make them the Qualified Default Investment Alternative (QDIA) for their plan. The QDIA is the investment option used by Plan Sponsors when a participant doesn’t make an investment election. A target date fund can be a mutual fund or collective investment fund which adjusts its risk as participants get closer to retirement. The farther the participant is from retirement, the fund tends to invest in equities which will provide for a higher return. As the participant gets closer to retirement, the investment mix shifts to a more conservative investment allocation. Most funds are named with a year, for example Retirement Fund 2040. Many participants feel that this simplifies the investment selection process, however, this may not always be the case. Participants need to be conscious of other factors such as existing balances in their plan and other retirement investments to name a few, along with their expected retirement age. From a plan sponsor perspective, the DOL provided guidelines in February 2013, Target Date Retirement Funds-Tips for ERISA Plan Fiduciaries, to educate plan sponsors on target date funds and some pointers in evaluating their fund options. Many plan sponsors already review the fund prospectuses, fund expenses as well as fund performance as part of their overall fiduciary review, however, some suggestions below are those that are more specific to target date funds and can assist in meeting the DOL expectations.
1. “Establish a process for comparing and selecting TDF’s”. Many of you may be saying to yourself, we already do this, but some key points to the process the DOL elaborated on are
- Review how well the TDF characteristics align with the eligible participants age and retirement dates.
- Consider the impact of other retirement plans that the plan sponsor provides to employees.
2. “Inquire about whether a custom or non – proprietary target date fund would be a better fit for your plan”
- A custom proprietary target date fund may have advantages by offering more than one fund manager vs. only the TDF provider itself, allowing more diversification to the plan sponsor.
- Keep in mind their may be additional cost associated with a custom fund, but it is worth a discussion with the investment provider.
3. Employee education
- Education is not only required for the Plan Sponsor, but also for the participant.
- The participant needs to understand the TDF’s offered as an investment option so that they can make an educated decision.
- In addition, the fees that are charged to the participant are a key item in educating them on the fund options
Please contact us with additional questions on assisting you with any of your employee benefit needs.