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.