Are Your Target Date Funds Making You A Target?

                                

                                                   By Carol Buckmann

                                                   carol@cohenbuckmann.com

Odds are high that target date funds are your 401k plan’s default investment.  These funds, which shift the mix of stock, bonds and cash based on the participant’s expected retirement age, are referred to as tdfs and have become extremely popular since the Department of Labor designated them as a permissible qualified default investment alternative, or “QDIA”.  Plan fiduciaries receive the protection of a safe harbor if they prudently select a QDIA for participants who don’t or can’t make their own investment choices.  However, if fiduciaries imprudently select a tdf, the safe harbor doesn’t protect them.

Although participants’ entire accounts may be invested in these funds, all too many tdfs are selected by fiduciaries simply because it is convenient, or there is some incentive, to offer their provider’s funds.  This makes them an easy target for class action lawyers.  Custom funds, which are designed for an employer’s specific participant group, are also vulnerable if they don’t include appropriate investments.

The plaintiff’s firm Cohen Milstein has a section on its website on target date fund investigations.  Their review focuses on improper investment strategies, excessive fees, self-dealing issues and whether the selection of the funds was prudent.  Participants are encouraged to contact the firm to review the plan’s information. 

We have had a number of suits already filed challenging tdfs.  A suit against Intel challenging use of alternative investments such as hedge funds in a custom target date fund was recently dismissed as not timely filed, but the complaint raises issues that, if true, might have been found to be a fiduciary breach.  Johnson v. Fujitsu challenged the use of alternative asset classes such as real estate partnerships and natural resources in a custom target date fund. Wells Fargo was sued for using its own tdfs even though plaintiffs contended that they cost 2.5 times the cost ofsimilar funds offered by Fidelity and Vanguard. In fact, use of proprietary tdfs is a red flag for the litigators.

These funds may be a ticking time bomb for plan fiduciaries who haven’t prudently investigated and compared their plan’s tdfs to other options available in the market.  There are lots of differences between tdfs.  Do you know what they are?

Here is a short checklist for company fiduciaries:

  •        Do we know the alternative QDIA choices (balanced funds and managed accounts) and              have we compared them to tdfs?
  •        Do we know our funds’ glide path?  This is the way the asset allocation changes as                      participants age, and it can differ from fund to fund, making some more conservative and          some riskier than others. 
  •        Have we benchmarked our tdf’s fees against competing offerings?
  •        Have we considered whether to use an off-the shelf tdf (usually investing in mutual funds)          or a custom tdf? 
  •        If we are using a custom tdf, have we evaluated the investments included, particularly                alternative investments? How much of the tdf is invested in alternative investments?
  •        Have we evaluated and benchmarked our funds’ performance? 
  •        Do we regularly monitor our tdf’s performance and fees, which can change over time?

A prudent fiduciary process remains the best defense if your plan’s tdf is challenged.