Scott Matheson, CFA, CPA
Senior Director | CAPTRUST Defined Contribution Practice Leader
In late February, the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) released a document titled “Target Date Retirement Funds — Tips for ERISA Plan Fiduciaries.” Given target date asset growth since the Pension Protection Act of 2006 (PPA) and the increasing importance of target date funds in defined contribution plans, the retirement plan community has been anxiously awaiting guidance from the DOL on prudent practices for selecting and monitoring these unique investment options.
In addition to providing some background and definitions related to target date funds, the DOL tips document provides eight major items to consider in target date fund selection and monitoring. In this article we capture the eight items along with our interpretation of how plan sponsors should practically apply these suggested considerations, as well as our view on fiduciary best practices for oversight.
The DOL’s tips are as follows:
1. Establish a process for comparing and selecting target date funds.
2. Establish a process for the periodic review of selected target date funds.
3. Understand the funds’ investments — the allocation to different asset classes (stocks, bonds, and cash), individual investments, and how these will change over time.
4. Review the funds’ fees and investment expenses.
5. Inquire about whether custom or non-proprietary target date funds would be a better fit for your plan.
6. Develop effective employee communications.
7. Take advantage of available sources of information to evaluate the target date funds you have selected and the recommendations you received during your selection process.
8. Document the selection and ongoing review process.
For reference, a full copy of the EBSA guidance can be found at www.dol.gov/ebsa/pdf/fsTDF.pdf.
Target date funds are still relatively young compared to other more traditional investment options offered in defined contribution plans and do not lend themselves to easy benchmarking. According to the Plan Sponsor Council of America’s 55th Annual Survey of Profit Sharing and 401(k) Plans, 69.7% of plans offer target date funds as their QDIA as of 12.31.2011. Combined with plan design features like automatic enrollment and escalation, these investment options are quickly becoming the primary investment program for many plans’ delegator populations. All of these factors amplify the need for plan sponsors to thoughtfully select appropriate target date funds and revisit their selection periodically.
While the DOL tips have upset some in the industry (namely target date fund managers), we applaud the EBSA for committing to paper what they deem important in this critical area of plan management. At a minimum, it has forced a discussion — one we very much look forward to having with you.
For a copy of the checklist, please download attachment below.