Individuals Have Seen The Light – Now What?

There are 4.6 million participants in company-sponsored retirement plans managed by the Vanguard organization, and 72% of them have some exposure to target date funds (TDF). This is great news for individuals and the retirement industry, as it removes an important asset allocation decision from untrained employees who might just be tempted to “time the market”.  The growth in the use of TDFs has been staggering.  According to Vanguard, only 17% used TDFs as recently as 2007.
With this incredible growth comes great responsibility for the plan sponsors. Fortunately, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) has produced a cheat-sheet on how a plan fiduciary should review and monitor their TDF offerings. Why? As you can imagine, there are considerable differences among fund families when it comes to TDF offerings, including the use of active managers versus passive indexes, to retirement through retirement allocations, overall asset allocation decisions at similar vintage years (glide path), product choices, fees, etc.
Given this array of choice, it is essential that a process is in place for the committee and their consultant to regularly provide oversight.
Here is the list that the DOL has provided:
  • Establish a process for the periodic review of the selected TDFs
  • Understand the fund’s investments and how they will change over time
  • Review the Fund’s fees and investment expenses
  • Inquire about whether a custom or non-proprietary product is a better fit for your plan
  • Develop effective employee communications
  • Take advantage of commercially available sources of data to review TDFs
  • Document the process

Given that most employers/employees are engaged in DC-related retirement programs, the DOL and IRS are paying far greater attention to how well these plans are being structured and managed. It behooves the fiduciary committee for these plans to implement a review process similar to the one highlighted above.

In fact, this process would be beneficial for manager selection (and other decisions) outside of TDFs in employee-directed plans. Defined benefit plan committees should engage in a similar review process when managing their plans on a regular basis.

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