Picking Target Dates, Not as Simple as you Thought!
Picking Target Dates, Not as Simple as you Thought!
By John Friar, AIF®, Financial Consultant
Hausmann-Johnson Bauch Financial
As we look back over the last decade, Target Date Funds (TDFs) have moved from the abyss of the defined contribution plan world to becoming one of the main focal points of an employee’s investment strategy. TDFs have the potential to make saving for retirement more effective and straightforward for participants than in the past, but these benefits can come with struggles. Most notably, how do plan sponsors evaluate and understand the target date fund world?
TDFs represent a comparatively new and evolving field in the investment management industry, with much of their investment life span covering some of the most volatile and challenging years in market history. In recognition of the need for greater clarity, the Department of Labor in 2013 issued a memo providing guidance for plan fiduciaries relating to selecting and monitoring target-date funds and other options in retirement plans. Let’s review the DOL’s tips for plan fiduciaries.
Establish a process for comparing and selecting TDF’s: All too often investment review meetings focus on which large cap stock should the plan select, and little if any attention paid to how we are selecting target date funds. A good starting point for this process is to determine what the plan hopes to achieve with its’ TDF, and then evaluate how the TDF aligns with your plan’s goals.
Establish a process for the periodic review of selected TDFs: As we previously discussed, most fund reviews focus on traditional asset class evaluation, but how often are you looking at how your target date fund is operating? Plan sponsors and advisors should evaluate the TDF’s team, strategy and performance, and then periodically review to make sure they continue to align with your plans goals
Understand the fund’s investments: the allocation in different asset classes (stocks, bonds, cash), individual investments, and how these will change over time: A TDFs glide path reflects how its allocation to equity and fixed income investments change over time in accordance with the presumed risk-return profile of plan participants as they age. The TDF industry employs a wide range of glide paths, with different beginning and ending equity allocations, as well as different rates at which equity exposure declines over the life cycle. Again, it’s important to understand and evaluate if your TDFs glide path matches your plans objectives.
Review the fund’s fees and investment expenses: Fees in the retirement plan space have been a prominent topic for the last 10 years or so, but too often the focus is purely on fees. Although it’s vitally important to compare fees against other TDF providers, it too makes sense to determine if these fees and expenses are providing added value to help reach plan goals.
Inquire about whether a custom or non-proprietary TDF would be a better fit for your plan: This topic of conversation has really just started to really come onto the main stage over the last few years. The decision to select a proprietary or multi-manager target-date series is a complex one, which will vary from plan to plan. But to be clear, the distinction between the two is descriptive, not predictive. An advisor or sponsor needs to investigate further into the TDF specifics to make a prudent decision about best fit for a given plan.
Develop effective employee communication: With any important plan decision affecting participants in a retirement plan, it’s important to make sure the decisions made are clearly communicated and easily understood. Beyond the required disclosures, it may also be helpful to have education meetings that specifically address how your TDF works and operates. The greater the comfort level, the greater chance an employee will see value.
Take advantage of available sources of information to evaluate the TDF and recommendations you received regarding the TDF selection: We will keep this one pretty simple, work with your advisor or recordkeeper provider for insights on available tools and resources.
Document the process: For those of you who know me, our firm stresses the importance of documenting your decisions, and it’s the same for your selection of a TDF.
The defined contribution landscape continues to change so please make sure you aren’t getting left in the dust without a plan in place.
Name: John Friar, AIF, Financial Consultant
Hausmann-Johnson Bauch Financial
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