The Wall Street Journal recently published an article debating the quality and efficacy of target-date funds—a decade after the financial crisis and as these funds have become the centerpiece for many participants in employer-sponsored retirement plans.
According to the article, target-date funds’ (or TDFs) total assets reached $1.1 trillion by the end of 2018, up from $158 billion in 2008. This growth is largely due to the popularity of employers automatically enrolling new employees in their plan and using TDFs as the default for participants who don’t choose their own investments. Some research shows 85% of new contributions to 401(k) plans will go to TDFs by 2020*.
Opinions in the article varied overall, but the general consensus was: While TDFs can be a perfectly adequate way to save for retirement, some investors may benefit from a more customized approach.
Here’s what retirement plan sponsors should know as they consider TDFs for their practice retirement plans.
An Overview of TDFs
TDFs come in year-based vintages, ranging from 2020 to 2065. Investors simply choose the vintage that most closely aligns with the year they plan to retire. The asset allocation and diversification decisions are made by the investment manager.
As the planned retirement year approaches, the portfolio gradually reduces the risk, generally by shifting from stocks to bonds.
Not All TDFs Are Alike
While the TDF concept is universal, the funds vary significantly in glide path management (methodology by which they de-risk), asset allocation and diversification strategy, utilization of active and passive investing, and expense.
Growth and variability in strategy have led to increased scrutiny in recent years. In an effort to ensure that plan fiduciaries properly evaluate TDFs, the Department of Labor (DOL) released tips for selecting and monitoring a series stating that, “There are considerable differences among TDFs offered by different providers, even among TDFs with the same target date.”
These recommendations include:
- Align participant and TDF characteristics
- Understand underlying investments
- Review fees and investment expenses
- Consider custom or non-proprietary options
- Develop effective employee communications
- Document the process
Our Outlook on TDFs
In our view, TDFs are an effective and often inexpensive way for participants to save for retirement, especially early in their career.
However, as participants near retirement—and, in some cases, accumulate significant assets outside of their retirement plan—a more custom approach may be appropriate to help deal with their more complex financial state.
It’s important for retirement plan sponsors to be aware of their plan’s target-date series and what’s most appropriate for their staff.
At Curi Capital, we take clients through an advance suitability exercise to determine what series may be the best fit. We also offer a more custom approach for those with highly varied demographics, along with individual wealth management and financial planning for those plan participants with more complex needs.
Curi members and clients looking for more information or support on this topic are encouraged to reach out to the Curi Capital team at 984-202-2800.
*Ceruilli Associates Inc.
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