Identifying the Target for Your Target Date Funds

When 2021 wraps, plan fiduciaries will encounter an opportune time to closely review their plans’ target date funds (TDFs). The review requires special consideration. TDFs are not oranges to be compared to the apples that make up the plan’s core funds list. They necessitate an understanding of different TDFs’ unique features, careful exploration of the Department of Labor’s (DOL’s) tips for fiduciaries, and a process for memorializing those prudent steps. Fiduciaries should be prepared to identify the target for their target date funds.

Widespread Usage. TDFs have become the most widely used in-plan investment solution. The use has grown exponentially over the past 15 years after the Pension Protection Act of 2006 afforded fiduciaries tremendous relief under the Qualified Default Investment Alternative (QDIA) rules. This trend has led to a sharp decrease in the amount of “self-directed” assets held in plans’ core funds list. As we look ahead, it appears quite clear that plan assets will increasingly be consolidated in target date funds, managed accounts, and in-plan guaranteed income solutions. Fiduciaries are well-served to afford proportionate time to the review of those investment options.

Significance of QDIA Rules. In fact, fiduciaries should add an extra layer of consideration for a plan’s default investment option. DOL regulations bless three categories of investment options for long-term QDIA treatment: TDFs, managed accounts, and a balanced fund. Although the QDIA-eligibility of TDFs provides comfort, some fiduciaries misunderstand that as a license to give them less attention. To the contrary, though, a plan’s QDIA likely requires more attention than other funds, particularly with the increased use of automatic enrollment (which leads to more default investment elections). Potential liability rests where the assets rest; more assets in a QDIA merits more review of the QDIA.

DOL Tips for Fiduciaries. In 2013, the DOL provided a list of TDF Tips for plan fiduciaries. The Tips recognize that “there are considerable differences among TDFs offered by different providers, even among TDFs with the same target date.” They also suggest that 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.” The Tips should be the centerpiece of any fiduciary review process relating to a plan’s TDFs.

Show Your Work. Fiduciary responsibilities always trigger the message from the math teachers of our youth: you must show your work. The first quarterly meeting in 2022 will be the perfect time to take a closer look at your plan’s TDFs. Do they appear to reflect the DOL’s Tips? Do they fit the committee’s goals for an age-based do-it-for-me solution? Do they take into account further fee compression among TDF options, including the race into the single digits among the most common index options?

During the Fiduciary 15 webinar, we’ll preview QPA’s Target Date Deep Dive Report, which illustrates a way for fiduciaries to (a) identify differences among TDF strategies, (b) assess performance across different market conditions, and (c) memorialize the application of the DOL’s Tips. We plan to share that Deep Dive report with clients next quarter, as well, but hope you’ll join us for a preliminary conversation.

We cannot be certain whether your TDFs hit or miss the target without first identifying the appropriate target for your specific organization. On the heels of a crazy 2020 and a fair amount of positive market performance throughout 2021, this is the perfect time for a quick look bad and a focused look ahead.

We look forward to seeing you there!-Qualified Plan Advisors

Full Bio Matthew Eickman, J.D. is the director of ERISA services for Qualified Plan Advisors and the branch manager of Prime Capital Investment Advisors' (PCIA) Omaha branch. Matthew provides fiduciary training, Investment Policy Statement oversight, and design and vendor benchmarking. He is also a member of the firm’s Investment Advisory Committee and the QPA Steering Committee. He holds his FINRA series 66 registrations, and his life and health insurance licenses in multiple states.

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