Employee Benefit Plans: The 411

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

Target Date Funds

Does your plan have target date funds (TDFs)? Are you doing enough in managing those investments as the plan fiduciary? Let’s see what the Department of Labor (“DOL”) says about these funds.

The DOL has general guidance on the selection and monitoring of TDFs. With many plan sponsors making these TDFs available to participants, it not only helps the non-savvy participant select an investment without having to actively manage their retirement account, but it also satisfies the DOL’s qualified default investment alternative (“QDIA”) requirement. This requirement is for plan sponsors to designate default investments for participants who enroll and do not select an investment choice. This typically occurs in a plan where auto enrollment is in play.

TDFs are attractive investments because they automatically rebalance to become more conservative as the participant approaches retirement age. When retirement is a number of years away, the fund is heavily weighted in stocks which can render larger returns but can also be quite volatile. As retirement date nears, the investments are more weighted in bonds which are more conservative and less volatile. TDFs can vary drastically from one fund manager to another, even TDFs with the same target dates. Because of these differences, it’s a responsibility of the fiduciary to understand the differences and make the best choice for their plan.

Here are some things to remember when choosing TDFs:

  • Establish a process for comparing and selecting TDFs
  • Establish a process for monitoring the selected TDFs
  • Understand the TDFs investment mix, including the allocation in different asset classes, individual investments and how these will change over time
  • Review the fees and investment expenses to ensure they do not violate the plan document
  • Document the process of selecting and monitoring

For more information, visit the DOL’s website.

By Leslie A. Lee, CPA