Pension plan experts remind plan sponsors that evaluating target date funds is a 401k fiduciary responsibility. Though the majority of 401k plans offer target date funds, many fiduciaries don’t know how they work. With lawsuits on the rise, ignorance is not bliss. Get informed—and protected too.
Prudent Process: Evaluating Target Date Funds
It’s common for retirement plans to use target date funds as the qualified default investment alternative (QDIA) for participants who don’t make their own investment choices. Although the Department of Labor considers target date funds among the “safe harbor” QDIAs, it’s a myth that fiduciaries are therefore relieved of obligations to prudently select target date funds—and monitor performance. As 401k Specialist emphasizes:
Many fiduciaries responsible for selecting their 401k plan’s target date funds don’t understand how these funds work. The risk of staying ignorant is increasing. Lawsuits challenging target date fund selection are on the rise, and plan fiduciaries need to be able to defend their choices in response to these suits.
New products, such as target date funds that provide lifetime income options or make private equity investments are becoming available. For all of these reasons, if target date funds are included in a plan’s investment menu, it is essential for fiduciaries to develop a prudent process for evaluating target date funds in partnership with their investment professionals.
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Target Date Funds In the Investment Lineup?
The majority of 401k plans offer target date funds as an investment option—and many participants are invested in these funds. That’s why plan sponsors are advised to:
- Make sure that the plan’s investment policy statement includes provisions on selecting and monitoring target date funds.
- Compare their vendor’s proprietary funds to other available alternatives.
- Select an appropriate benchmark to evaluate the funds. Be prepared to challenge any inappropriate benchmark cited to show lagging performance and high fees by plaintiffs in participant lawsuits. This can result in a win in court, as shown in a recent decision dismissing a lawsuit filed against Intel challenging Intel’s target date fund investments. The court refused to accept the benchmarks used by plaintiffs, saying that it had not been demonstrated that the benchmarks were appropriate.
- Understand the different fees and compare fund family fees, bearing in mind that target date funds have multiple layers of fees. ERISA does not require selecting the least expensive fund or using only index funds.
- Consider doing an actual rfp for target date funds.
- Carefully document the reasons for the fund selected.
- Regularly monitor the funds.
- Document reasons for not removing retained funds if performance lags peer funds.
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