The Department of Labor
is getting its two-cents on the subject of target date funds with an innocuous-enough sounding document titled Target Date Retirement Funds - Tips for ERISA Plan Fiduciaries
In this guide, the DoL declares that "there are considerable differences among TDFs offered by different providers, even among TDFs with the same target date. For example, TDFs may have different investment strategies, glide paths, and investment-related fees. 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 document outlines to participants a number of tips on "What to Remember When Choosing Target Date Funds." Some, but not all, are listed below:
Establish a process for comparing and selecting TDFs. In general, plan fiduciaries should engage in an objective process to obtain information that will enable them to evaluate the prudence of any investment option made available under the plan.
Establish a process for the periodic review of selected TDFs. Plan fiduciaries are required to periodically review the planís investment options to ensure that they should continue to be offered. At a minimum, the review process should include examining whether there have been any significant changes in the information fiduciaries considered when the option was selected or last reviewed.
Understand the fundís investments Ė the allocation in different asset classes (stocks, bonds, cash), individual investments, and how these will change over time. Have you looked at the fundís prospectus or offering materials? Do you understand the principal strategies and risks of the fund, or of any underlying asset classes or investments that may be held by the TDF? Make sure you understand the fundís glide path, including when the fund will reach its most conservative asset allocation and whether that will occur at or after the target date.
Review the fundís fees and investment expenses. TDF costs can vary significantly, both in the amount and types of fees. Small differences in investment fees and costs can have a serious impact on reducing long term retirement savings.
Inquire about whether a custom or non-proprietary target date fund would be a better fit for your plan. Some TDF vendors may offer a pre-packaged product which uses only the vendorís proprietary funds as the TDF component investments. Alternatively, a ďcustomĒ TDF may offer advantages to your plan participants by giving you the ability to incorporate the planís existing core funds in the TDF. Nonproprietary TDFs could also offer advantages by including component funds that are managed by fund managers other than the TDF provider itself, thus diversifying participantsí exposure to one investment provider. There are some costs and administrative tasks involved in creating a custom or nonproprietary TDF, and they may not be right for every plan, but you should ask your investment provider whether it offers them.
Develop effective employee communications. Have you planned for the employees to receive appropriate information about TDFs in general, as a retirement investment option, and about individual TDFs available in the plan? Just as it is important for the plan fiduciary to understand TDF basics when choosing a TDF investment option for the plan, employees who are responsible for investing their individual accounts need information too. Disclosures required by law also must be considered.
For more on the DoL's tips on TDFs, go to here here
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