Nearly every defined contribution plan sponsor now offers target-date funds in its participant investment menu, as these funds, often named for the year a participant expects to retire, eliminate the need for employees to construct their own investment portfolio. A recently released white paper about TDFs examines plan fiduciaries’ uncertainly regarding what TDFs should contain and illustrates the importance of disclosure.
Although TDFs are intended to make retirement investment easier, many DC plan fiduciaries are unclear about what exactly their chosen TDFs hold. This uncertainty comes from lack of complete and comparable disclosure among TDFs, says a white paper plan investment manager Manning & Napier released Sept. 10.
Plan sponsors know their fiduciary duty to select investments appropriate to meet the retirement savings needs of their participants, but they may not know how to examine TDFs in detail, according to this asset manager. The paper outlines three key considerations for fiduciaries during their TDF due diligence process:
- transparency of the portfolio structure;
- portfolio management coordination; and
- possibility of overdiversification.
The basic tenets of plan sponsors’ fiduciary obligation, especially as it relates to qualified default investment alternatives, can’t be achieved without transparency, Manning & Napier says, so the firm suggests ways this investigation into TDFs’ construction can be improved for plan sponsors.
Background on TDFs
TDFs are funds with varied asset allocation that becomes more conservative as a participant nears retirement. They are labeled with a date that signifies when the participant investor is likely to retire. Many 401(k) funds have chosen to offer these types of “lifecycle funds” as the default investment option for participants. Surveys have found that participants like these choices for their DC retirement accounts but often do not understand well how they work.
At the end of 2012, assets in U.S. TDFs totaled more than $700 billion across mutual funds, collective investment trust funds and custom fund structures, the report says. Across vehicles, the value of assets in TDFs may surpass $1.5 trillion within the next decade, the firm says, likely making these investments the predominant source of retirement income for millions.
In February 2013, the U.S. Department of Labor released additional guidance for fiduciaries to follow for TDF screening and monitoring. The guideline that may pose the biggest challenge to fiduciaries is No. 3: “Understand the fund’s investments … and how these will change over time.” Criteria such as performance, fees, management and organization are always important. However, it is critical for the fiduciary to understand overall portfolio construction and underlying vehicles, along with the “glidepath” planned for the fund’s investment aggressiveness, to determine whether the investment process is prudent.
Even with standardized reporting and disclosure through regulatory filings or other sources, TDF products are still difficult to compare on a side-by-side basis because of differences in these factors.
To read the complete story on Thompson’s HR Compliance Expert, click here.