By 2019, it is projected that 88% of new retirement plan contributions will be invested in target date funds.¹ Since introduction of the Pension Protection Act in 2007, the use of TDFs as Qualified Default Investment Alternatives (QDIAs) has increased from 36 to 86%.² As a retirement plan advisor, you may not be devoting 88% of your attention to the TDFs, but in the future your process for determining the target date solution you recommend will be increasingly vital.
401(k) and 403(b) plans are participant-directed plans where it is incumbent on nurses, steelworkers, software engineers, sanitary engineers and all other plan participants to make investment decisions that can affect the value of their retirement plan and in many ways the quality of their life in years ahead. Most of these folks are probably excellent at their chosen profession, but often haven’t a clue about deciding how to allocate hard-earned dollars going into their retirement plan. In the last decade target date funds have filled a large void by helping individuals select suitable portfolios of investments based on their age and years until retirement. Now most individual participant investment choices are defaulted into TDFs.
As retirement plan advisors, it is critical to help plan clients select QDIA options aligned with the demographics of their unique employee population. Glidepaths differ greatly as evidenced by the 32% gap between best and worst performing TDFs in 2008.³ Plan sponsors and participants typically do not understand the riskiness of the glidepath of their target date fund. If you don’t already have a strong independent process for providing effective fiduciary guidance in selecting and monitoring these important investment choices, then you may be failing your clients and missing an opportunity to differentiate your value.
“Dear Mr. / Ms. (or other preferred pronoun) Plan Sponsor, would it surprise you to know that the target date funds in the plan for which you are an accountable fiduciary have a glidepath that is very aggressive? Please let me take you through a process for determining whether this series of investments, to which most of your employee contributions are going, is a fit with the needs and characteristics of your staff. Then we can explore other TDF strategies that may be a better choice.”
In 2013, the DOL issued Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries⁴, outlining best practices including:
- Establish a process for comparing and selecting TDFs and for periodic review
- Understand fund investments – the allocation in different asset classes…and how these will change over time (i.e., glidepath)
- Inquire about whether a custom or non-proprietary TDF would be a better fit for your plan
- Document the process
RPAG offers a TDF fit process that advisors can use with plan sponsor clients to help satisfy their fiduciary obligations and narrow the universe of TDF solutions to those offering a glidepath consistent with plan objectives, plan demographics and participant behavior. Advisors then use the RPAG Scorecard™ to analyze fund manager skill and select among this more suitable universe of TDF solutions. All 2035 funds were certainly not created equal.
My December 2015 article discussed the Next Evolution of Target Date Funds, and an insightful white paper on how “Oversimplification in Target Date Funds Endangers Participants Retirement Savings” in which flexPATH Strategies, LLC chronicles the evolution of target date funds and latest innovations in TDF solutions.
We are witnessing a quickly evolving array of TDF product choices with asset managers seeking to capitalize on the growth in this asset class. Use of recordkeeper’s TDFs are down from 70% to 32% from 2011-2015⁵, with platforms now offering more open architecture solutions. Custom TDF models continue to gain traction in the industry but often don’t adequately address glidepaths.
flexPATH Strategies offer a unique customized TDF solution with allocations based on projected retirement age, but with multiple risk-based glidepaths from which participants may choose along with open architecture selection of underlying funds. More than $3 billion in DC plan assets have moved to the flexPATH TDF Strategies since inception in June 2015.⁶
To receive a copy of this white paper or to discuss your retirement plan service model and resources and strategies available to help you support plan clients and scale your retirement plan business, please email firstname.lastname@example.org or call 707-861-9272.
If you will be attending the NAPA 401(k) Summit in Las Vegas soon, please visit RPAG booth #329 and adjoining flexPATH booth in the NAPA Exhibit Hall. Odds are it will be a more profitable use of your time than the casino. ________________________________________________________________