By Marlene Y. Satter
They might be the most recent addition to your 401(k) plan
, but that’s no reason to take your eye off your target-date fund line-up.
“Are You in the Wrong Target Date Fund?” is a new white paper from Towers Watson that makes that point, and others, about TDFs. Why? So much money is going into them, and there’s so much change in the funds themselves, that even TDFs added only a few years ago might already be obsolete from a suitability standpoint, according to TW.
Lest you doubt its importance, keep in mind that, according to the white paper, 86 percent of direct contribution plans now use TDFs as their default investment option. And employees are taking advantage. The Employee Benefits Research Institute says that TDF assets within 401(k)s tripled between 2006 and 2012, from 5 percent to 15 percent of aggregate assets. During the same time period, participants using TDFs more than doubled, from 19 percent in 2006 to 41 percent in 2012.
Also read: NAPA pushes for clear language on TDFs
The dollar figure is impressive, too; according to Morningstar’s 2014 Target-Date Series Research Paper, mutual fund TDF assets increased from $115 billion in 2006 to more than $650 billion by the end of March.
With that much money — and so many participants’ retirements — at stake, paying close attention makes plenty of sense. Last year, to make that point clear, the Department of Labor issued guidance “confirming that plan fiduciaries are responsible for periodically reviewing TDFs, just as they are for all other investment options in their DC plans.”
On the surface, TDFs are simple. They’re easy for participants to use and for sponsors to explain, which can mean that more people will take advantage of a plan that offers them. But dig just a little deeper and you’ll find, according to Towers Watson, that they “bring increased governance complexity of which many plan sponsors may not even be aware.”
While most plan sponsors are comfortable with equity and bond funds, which draw on single asset classes, TDFs aren’t so simple. They invest in multiple asset classes, and they shift asset allocations as time passes — the TDF glide path. That means they can pose tougher questions for plan sponsors at decision time.
Two ways to approach the matter, according to the paper, are the consideration of custom TDFs or passive off-the-shelf products to replace active products that may have multiple layers of fees and proprietary management.
Custom solutions are, of course, more tailored to an individual plan’s needs, but require more governance and can bring along the need for other changes, such as outsourcing changes or the need to unbundle. Off-the-shelf solutions are easier on governance requirements and simpler to put into place, but may not provide the optimum solution for employees.
Whether or not a change is in order, a closer look would definitely seem to be in order.
Originally published on BenefitsPro.com