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Market Perspective Summary

  • Legislative Updates

Department of Labor Target-Date Fund “Tips” for Plan Fiduciaries

August 07, 2013

Released on February 28, 2013, the US Department of Labor (DOL) “tips” help guide DC plan sponsors when selecting a target-date fund as an investment option in their plan.

  • The tips are sensible and should probably be taken quite seriously, considering the source.
  • The need for guidance has grown in importance recently, because target-date funds have become the most popular choice for a DC plan’s qualified default investment alternative (QDIA).

The DOL indicates fiduciaries should remember the following when choosing target-date funds:

  • Establish a process for comparing and selecting TDFs
  • Establish a process for the periodic review of selected TDFs
  • Understand the fund’s investments–the allocation in different asset classes (stocks, bonds, cash), individual investments, and how these will change over time
  • Review the fund’s fees and investment expenses
  • Inquire about whether a custom or non-proprietary target-date fund would be a better fit for your plan
  • Develop effective employee communications
  • Take advantage of available sources of information to evaluate the TDF and recommendations you received regarding the TDF selection
  • Document the process

Worth noting: Most of the above tips fall well within the current framework of good DC plan stewardship. But the inclusion of customization appears to be a strong step forward.

  • We’ve been encouraging larger plans to adopt customization for several years now. More recently, customization has become financially feasible for a wider asset range of plans. And customization works hand-in-hand with all the other tips from the DOL.

Is customization riskier than simply picking an off-the-shelf strategy?

  • We believe the opposite is true. If the costs are reasonable relative to the plan’s size, target-date customization helps fiduciaries more closely align their plan’s goals with their participant’s retirement savings (and spending) behavior.

Customization can help diversify investment provider exposure.

  • It also allows for incorporation of a plan’s best-in-class fund options from the core menu or even the company’s pension plan.
  • Customization also lets fiduciaries review all the target-date fund component investments individually and replace any underperformers without causing any hiccups to the target-date fund or the participant experience.

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