In February of 2013 the U.S. Department of Labor (DOL) issued a Fact Sheet titled Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries. The Fact Sheet’s purpose was clearly stated: “…to assist plan fiduciaries in selecting and monitoring TDFs and other investment options in 401(k) and similar… plans”.

The newly enacted 2016 DOL rule, commonly referred to as the “fiduciary rule”, made just about every retirement plan professional a fiduciary on 401(k) plans which means you must know and follow the processes found in this Fact Sheet. We have broken this process down into simple steps and lend additional insights throughout.

We and the DOL have five main issues with the first generation of TDFs and how the industry uses them today. In short, for each plan you work with, you must:

  1. Establish an objective process for comparing, selecting and reviewing your TDFs.
  2. Understand the fund’s investments and how they change over time.
  3. Determine if the expenses are appropriate for the services given.
  4. Know if the TDFs chosen have the ability to get defensive in market failures.
  5. Develop effective employee communications.

Comparing, Selecting, Reviewing and Documenting

Brand recognition is not a valid selection criteria. We explore in depth some of the selection criteria below, but know the DOL wants, on an annual or at least a biennial basis, a fair process of selection and review of TDFs and all 401k fund choices. Most importantly, you must document your decisions.

Start with the plan’s Investment Policy Statement. What are the demographics of the employee pool? What does the sponsor want and why? What do the employees want? (Ask!) Hold a meeting and explain the differences in the TDFs you are offering. Some may want the lowest possible expense and don’t care about anything else. Others would rather pay a bit more and get active management, asset allocation, more aggressive/conservative glide-paths and other attributes that are more appropriate and/or important to them.

Under the new regulation, the DOL is asking fiduciaries to review their TDF choices on an absolute and relative basis. Gone are the days of one size fits all. Proprietary fund pallets (all fund choices from one fund family) are specifically questioned in the DOL

Is the TDF family offered only in the plan because of a bundled/packaged 401(k) or are they the best fit for the plan?

Questions a Fiduciary must be able to answer about their Target Date Funds (TDFs)

Understand the fund’s investments

The general goal of TDFs is to have assets grow over time with “risk appropriate” investments. The fiduciary’s role includes “understand[ing] the principle strategies and risks of the fund, or any of the underlying asset classes or investments that may be held by the TDF”. What to look for: