Guide Supplements DOL's Fact Sheet on Target-Date Funds

Factors for plan fiduciaries to weigh when selecting among target-date funds

By SHRM Online staff Feb 24, 2014

A newly released white paper by the nonprofit Defined Contribution Institutional Investment Association supplements a 2013 Department of Labor (DOL) fact sheet on evaluating and selecting target-date funds (TDFs) used in 401(k) or other defined contribution plans.

“A good starting point for plan fiduciaries when reviewing TDFs is to note that, while there are many variations among these funds, generally, they all seek to offer diversification among asset classes, provide professional fund asset management and reduce exposure to equities as participants near retirement age,” said association Executive Director Lew Minsky.

These features, as well as the fiduciary protections available when one of these funds is offered as the plan’s qualified default investment alternative (QDIA), may make a TDF a prudent choice for both plan fiduciaries and plan participants. As an alternative to a TDF, however, some plan sponsors may choose another type of QDIA, such as a managed account or a balanced fund.

Considerations to Weigh

There are many differences among TDFs that plan fiduciaries should consider when deciding whether to incorporate this type of fund into an investment lineup, the white paper notes, including the following:

  • Variations regarding retirement glide path and portfolio construction.
  • Types of investments underlying the fund strategy.
  • Off-the-shelf vs. customized products.
  • Fund fees and other expenses.

Plan fiduciaries should consider these factors when determining which, if any, TDF would work best for their plan. Adhering to a selection process and documenting the decision are critical.

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