Schedule an Annual Target Date Fund Review ASAP
NOVEMBER 1, 2022
It’s easy to put the review of your target date funds (TDFs) on the back burner.1 Failing to check on your TDFs on a regular basis, however, could lead to a costly situation for your organization.
Few retirement plan sponsors conduct frequent reviews of their TDFs. A TDF that was appropriate four years ago may not be competitive anymore. Fees have dropped significantly, and ERISA requires plan sponsors to only pay reasonable fees. A product that was cheap three years ago may now be considered expensive.
With regulatory compliance, fiduciary risk, complex evaluation and litigation risk, there’s nothing simple about TDF governance. But an annual TDF review could be a best practice for managing your retirement plan — and it could reap benefits for your organization, including mitigating fiduciary risk, reducing long-term costs and improving benefits for your employees.
TDFs Bring Complexity and Increased Risks
TDFs are the fastest growing and largest asset class, with more than $3.3 trillion in assets as of the end of 2021.2 The U.S. Department of Labor (DOL) has established TDFs as a qualified default investment alternative (QDIA) and they represent the primary retirement savings for most plan participants. The selection and monitoring of TDFs is a fiduciary risk that shouldn’t be taken lightly for retirement plan sponsors.
TDFs provide a simple and appealing way for plan participants to save and reach retirement goals. Instead of choosing several investments to create a portfolio, a single TDF can match a participant’s retirement horizon. These funds are complex, however, and they provide some challenges for plan sponsors. The diverse nature of TDFs requires due diligence that far exceeds the standard selection criteria. These funds require a thorough evaluation.
On top of these concerns is the litigation risk that organizations may face by not prudently tending to the funds. In recent years, there has been an increase in ERISA litigation challenging the selection of TDF offerings.
The DOL provides governance framework for selecting and monitoring TDFs. Among the DOL’s tips is to conduct a regular review of the TDFs. For consultants at USI Consulting Group (USICG), a regular TDF review means annually.
Our yearly review with clients covers:
- Holistic evaluation: Review TDF performance and take industry trends and plan demographics into consideration
- Participant benefits: Select the most suitable TDF provider to improve retirement success for plan participants
- Fiduciary risk mitigation: Determine approaches to reduce the organization’s fiduciary risk, lessening the potential for litigation
- Fee analysis: Ensure the most optimal pricing is offered to plan participants by providing an annual comprehensive TDF investment fee analysis
- Long-term cost reduction: Provide TDF solutions that improve participant outcomes and lead to a more productive workforce, resulting in lower health care expenses to your organization over the long term
USICG’s completely independent approach to investment guidance sets us apart from competitors. To avoid conflicts of interests, we do not manage money nor create or distribute our own proprietary investment products. Our team is objective, putting positive employee and employer outcomes at the center of everything we do.
USICG recognizes the significance of the fiduciary review of TDFs for our clients. It’s important that organizations find an appropriate investment product that increases retirement readiness for plan participants and reduces fiduciary risk for plan sponsors.
USICG’s annual comprehensive TDF investment fee analysis helps ensure your participants are investing with the most appropriate and competitively priced TDF provider.
Case Study: Nationally Known Trucking Company Reaps Benefits From Annual TDF Review
This client had a variety of risk-based portfolios as its QDIA for the 401(k) plan. USICG’s consultants reviewed the company’s investment governance structure and determined the risk-based portfolios provided no data of the appropriate underlying allocations. In addition, the client did not have an investment policy statement (IPS) to establish an overall set of governing principles for the investment program.
USICG’s solutions included:
- Drafting an IPS, including monitoring criteria for TDFs in accordance with DOL guidance3
- Developing a fund mapping strategy to move from risk-based portfolios to a prudent TDF series, following the process outlined in the IPS
- Implementing annual TDF reviews to assess key concepts such as glide path design, underlying asset classes and managers, proprietary versus nonproprietary investments, tactical decisions, fees, risk-adjusted returns, etc.
These solutions helped the company reduce fiduciary risk, the potential for litigation and negative financial impact.4 In addition, the review showed that TDFs are the most appropriate choice for many plan participants, and can strengthen their retirement readiness to achieve a financially secure life after retirement.
How USI Consulting Group Can Help
USICG’s experienced team acts as the collective investment intellectual capital for evaluating, selecting and monitoring your plan’s TDFs. If you are interested in learning how your organization can benefit from our annual TDF review, contact your local USICG representative, visit our Contact Us page or reach out to us directly at firstname.lastname@example.org.
1 Target Date Funds are an asset mix of stocks, bonds, and other investments. The portfolio moves from a more aggressive, growth-oriented strategy during the accumulation phase to a more conservative, preservation-oriented strategy near retirement. The principal value of the fund(s) is not guaranteed at any time, including at the target date.
2 Berenberg Markets – Focus "The rising influence of target date funds on markets", September 2022.
3 Investment Advice for institutional accounts provided by USI Advisors, Inc. USI Consulting Group is an affiliate of USI Advisors, Inc.
4 Actual results will vary and are dependent upon various factors including, but not limited to: number of participants, total plan asset value, management fees, administrative costs and services provided.
Investment advice provided to the Plan by USI Advisors, Inc. Under certain arrangements, securities offered to the Plan through USI Securities, Inc. Member FINRA/SIPC. Both USI Advisors, Inc. and USI Securities, Inc. are affiliates of USI Consulting Group. | 95 Glastonbury Blvd. Suite 102 Glastonbury, CT 06033 860.652.3239
This information is provided solely for educational purposes and is not to be construed as investment, legal or tax advice. Prior to acting on this information, we recommend that you seek independent advice specific to your situation from a qualified investment/legal/tax professional.
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