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Are Your Target Date Funds Missing The Mark?

Joshua P. Itzoe, CFP®, AIF®

“The selection…is a fiduciary act and, therefore, ERISA obligates fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries. A fiduciary must engage in an objective, thorough, and analytical process that involves consideration of the quality of competing providers and investment products…”
-Preamble to the Department of Labor QDIA Regulation

With the passage of the Pension Protection Act of 2006 (PPA), target date funds (TDFs) have exploded in popularity and become the de facto qualified default investment alternative (QDIA) for most plan sponsors. More than 90% of defined contribution plans use a TDF, and, at the end of 2013, target-funds accounted for 38% of new contributions to 401(k) plans and 13.5% of total 401(k) assets. Total target-date fund assets were roughly $1.8 trillion at the end of 2018, and Cerulli Associates has forecasted target-fund assets to reach $2 trillion by the end of 2019, representing 88% of new contributions.

So while the QDIA regulation provides a “safe harbor” that protects fiduciaries from liability for their decisions, it only applies if they comply with all the requirements of the regulation which requires prudently selecting and monitoring the investment used as the QDIA.

Of note, given the explosive growth of TDFs, the Department of Labor (DOL) issued a bulletin in February of 2013 entitled “Target Date Funds – Tips for ERISA Plan Fiduciaries” to provide guidance to plan fiduciaries and clarify what types of things they should consider when selecting a suite of TDFs. This bulletin outlined the seven specific steps that plan fiduciaries should take when evaluating TDFs. When the DOL speaks, it is important to take note.

Historically, most TDFs have not been selected based on an “objective, thorough, and analytical process” as specified by the DOL for two primary reasons. First, the selection by plan sponsors has typically been tied to the choice of plan provider with little thought given to whether the TDF was right for the plan. Second, few consultants or advisors have developed a methodology or the technical expertise to guide the process for plan fiduciaries. With enhanced scrutiny by regulators, the evolving needs of participants, and the proliferation and complexity of TDF options in the marketplace, the DOL has also stated:

Within this general framework, however, there are considerable differences among TDFs offered by different providers, even among TDFs with the same target date. For example, TDFs may have different investment strategies, glide paths, and investment-related fees. Because these differences can significantly affect the way a TDF performs, it is important that fiduciaries understand these differences when selecting a TDF as an investment option for their plan.

Here are four indications it’s time to thoroughly review your plan’s TDF:

  1. Your TDF and your plan provider are the same (e.g., Vanguard, Fidelity, T. Rowe Price)
  2. You have never gone through an “objective, thorough and analytical” process regarding your TDF
  3. You don’t have any written documentation that includes how you reached decisions about the choice of TDF
  4. You cannot easily and accurately explain the “glidepath” of your plan’s TDF

If you can answer yes to any one of the above, Greenspring Advisors is here to help. We developed our own proprietary TDF analysis methodology called Target Date (k)larity®. It’s a comprehensive three-phase, seven-step evaluation process that aligns with DOL guidance and helps plan fiduciaries choose the most appropriate TDF strategy for their participants and help fulfill their fiduciary duties. Please contact us if you would like to learn more about Target Date (k)larity® and what’s involved in the process.