In our modern, one-stop-shop culture of Walmart and Amazon, target date funds (TDFs) have become increasingly popular for defined-contribution retirement plan participants. The automatic rebalancing that moves the fund more conservative as the retirement date approaches is very appealing to many workers who lack both the knowledge and interest in choosing and maintaining their own portfolio.
Not only have TDFs become a must-have for retirement plans, they are increasingly used as the qualified default investment alternative (QDIA). The QDIA is the default investment that participants are placed in when they fail to elect an alternative. Because of this, increasing numbers of plan participants are investing in TDFs, making it all the more important to ensure that a plan offers high-quality TDFs.
As an advisor to a qualified retirement plan, your clients count on you to help them make wise choices and fulfill their fiduciary duty. Part of this is the selection of TDFs. With so many options available, it can be difficult to choose just which fund is right for a particular retirement plan. Here are some steps that will help you and your clients as you make your selection:
Steps To Take When Choosing Target Date Funds
1. Establish A Process
You should have an objective process that you follow to gather and compare information for the TDFs that you are evaluating. If you follow the same process and gather the same information, it will be much easier to compare them and make an informed decision. The process should include gathering such information as fund performance, fees, and expenses. Not only should you compare the funds to each other, but you should compare them to participants’ needs. This could include employee ages, expected retirement dates, turnover, contribution rates, or the existence of a defined benefit plan as well.
You will also need a process for periodically reviewing the plan’s TDFs. An in-depth review should be done anytime the TDF experiences a significant change, such as a change in investment strategy or management, or the plan itself experiences a major change of objectives.
2. Understand The Fund’s Investments
In order to make a responsible decision, you will need to understand the TDF’s investments. You need to know its asset allocation, individual investments, and how they change over time. Make sure you have a clear picture of the strategies and risks of both the fund and its underlying investments. It is crucial that you understand the fund’s glide path, at what point it reaches its most conservative level, and how that fits with employee expectations.
3. Review Fees & Expenses
As a fiduciary, it is always important to understand the types and amounts of all of the various fees and expenses related to a fund. With TDFs, don’t only pay attention to the fund’s fees, but those of the underlying investments as well. If there is a large discrepancy, make sure you know what you are getting for those extra charges.
4. Look For Other Options
Ask if a custom or non-proprietary TDF could be a better fit for your client’s plan. It could help diversify plan participants’ exposure to a single investment provider or incorporate the plans’ existing core funds. While they can be more expensive than the pre-packaged funds, it is always a good idea to investigate all of your options.
5. Communicate With Employees
The law requires certain disclosures regarding the plan be made to employees. In addition to that, it is important to educate plan participants on what TDFs are and how they are used for retirement. They need all of the information regarding the specific TDF that you have chosen for their plan as well. It doesn’t help very much to find the perfect fund if the plan participants don’t know about it or understand why it is perfect for them.
6. Document Everything
It is your client’s fiduciary duty to act in the best interest of the plan’s participants. As always, it is important to document the entire selection process including the criteria used to make a final decision in order to prove that they fulfilled that duty. If there is ever any doubt as to their motivations or due diligence, a well-documented process is their best defense.
How I Can Help
Selecting target date funds for a retirement plan can be a long and arduous process. It is important to have a solid understanding of the available funds, how they fit into your client’s unique retirement plan and how their specific nuances compare to each other. Working with an experienced pension specialist can help you and your clients make faster, better decisions regarding TDFs. If you need help with the TDF selection process, email me today at firstname.lastname@example.org. Together we can find the best TDFs for your client’s particular retirement plan.
About Kenny Phan
Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services, a 3(16) fiduciary. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses in the greater Phoenix area, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.