ERISA

Target Date Funds and Fiduciary Risks

07.07.2021

 

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.

With a long list of fiduciary responsibilities and evolving plan design considerations, plan sponsors, no matter how diligent, continuously risk personal exposure for breach of fiduciary duty. Imagine the time and money that defending yourself against even an allegation would cost? Why take chances? At Colonial Surety, you can affordably obtain fiduciary liability insurance and get peace of mind that your personal assets are protected from a breach of responsibility in the administration or handling of the employee retirement plan. With an annual premium that is less than what you would pay for just one hour with an expert ERISA lawyer if disaster strikes, Colonial can quickly help you obtain protection now: Fiduciary Liability for Plan Sponsors Here.

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.

 

Doable Today!

Take a breath—and a few minutes to update and upgrade protection plans for yourself, your company and the retirement plan. It’s affordable—and efficient at Colonial Surety. Our comprehensive packages for plan sponsors provide:

 

  • The ERISA bond required to protect the assets of the retirement plan from theft; 

 

  • Fiduciary Liabilitycoverage to protect you and your assets from personal liability; and, 

 

  • Cyber Liability coverage to safeguard your company and plan from covered losses and expenses in the event of a cyber breach.

 

Colonial makes it so easy and affordable to secure all this coverage that you can do it right now: Complete Plan Sponsor Package Here.

 Colonial Surety Company is in business all across the USA. We are rated A Excellent” by A.M. Best Company and  U.S. Treasury listed.

 Serving customers since 1930, Colonial Surety is the trusted source for the pension industry to secure legally required ERISA bonds, fiduciary liability insurance and cyber-liability insurance. We help safeguard plan sponsors, pension professionals and financial advisors – and keep their businesses compliant – with pain-free, efficient, and friendly service every time.