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A Better Methodology for Monitoring Target Date Funds

Target date funds play an increasingly important role in retirement plans, and monitoring a plan’s TDF options is fast becoming one of the most important fiduciary obligations plan sponsors face in managing their retirement plan investment lineup. According to a white paper by Cammack Retirement Group, TDFs hold more than half a trillion dollars, including DC plan assets, and there’s no end in sight. Many industry experts estimate that TDFs will hold a substantial percentage of all DC plan assets within the next decade.

TDFs’ simplicity and flexibility help explain the rapid growth of their popularity and assets, the paper argues. But while TDFs are simple and easy to use, monitoring them may not be. As it worked with plan sponsors, Cammack discovered that monitoring TDFs poses unique challenges. The disparity in glide paths, underlying investments and fees among products compounds the difficulty. Yet, the fiduciary standard under ERISA for monitoring TDFs is no less stringent than the standard that applies to other plan investments.

The paper suggests that retirement plan fiduciaries and committees should give greater emphasis to the glide path construction from ages 45-65. It argues that this group has the most assets and the greatest po¬tential to be affected by market fluctuations. The paper also suggests that plan sponsors separate TDFs into categories and apply a two-tiered analysis that considers whether the plan is: (1) offering the correct TDFs, with an appropriate glide path and risk level; and (2) if it is, whether the TDF is performing as anticipated and is charging reasonable expenses. 

John Iekel is Senior Writer and Editor for the ASPPA Net and NTSA Net portals.