Evaluating your Target Date Funds

Over the past decade, TDFs have become the cornerstone of investing for many of 401(k) and 403(b) plan investors. With TDFs hitting a record $3.5 trillion at the end of 2023, target date investing has become the investment option of choice for retirement plan sponsors and many of their employees¹. Employers appreciate the fiduciary relief that can occur when utilizing TDFs as a default investment option, while employees like the simplicity of the “set it and forget it" approach to investing.

Legislation in 2006 facilitated the growth of TDFs, which certifies these funds as a qualified default investment alternative (QDIA). A QDIA is an investment alternative that has been selected as a plan level default for any participant failing to select their own option(s). As a result, many retirement plans offer TDFs as a default option for participants because they help plan sponsors meet their fiduciary obligations: Providing participants with a diversified and appropriate investment vehicle for their retirement needs.

The importance of evaluating TDFs.

While TDFs make it easier to plan and save for retirement, it is important that plan sponsors look under the hood to find the best fit for their employees. Also, the ongoing monitoring, processes, and procedures for evaluating TDFs are equally important.

Evaluating TDFs is a multi-faceted process that requires a deep dive into the three components of TDF design – glide path, asset allocation and the underlying asset managers. The TDF’s glide path represents its changing mix of investments overtime. As a participant’s target retirement date nears, the fund “glides down” to a more conservative mix of investments. The asset allocation determines the balance of stocks and bonds as well as the number of sub-asset categories. The number of asset classes that TDFs invest in can range from as few as five, to more than fifteen. The selection of asset managers should consist of having a thorough and defensible due diligence process that optimizes retirement outcomes.

It is also important to note that several of the largest retirement plan recordkeepers are also in the asset management business. A common practice for these recordkeepers is to include their proprietary TDFs in the fund lineup in exchange for a reduction of their recordkeeping fees. While this practice is not inherently flawed, a plan sponsor should apply an independent due diligence process for evaluating the appropriateness of the recordkeeper’s TDFs.

Evolution.

In recent years, TDFs have become more personalized and dynamic. Next generation TDFs consider the unique attributes of each participant – not only age but also their balance, salary, and the percentage of compensation they and their employers contribute to the plan. The goal: An asset allocation better calibrated to the risk and return needs of individual participants.

“Another recent trend includes TDFs that provide guaranteed income solutions for employees nearing retirement,” said John Randall, a retirement plan advisor with 1834. “Paternalistic employers are interested in helping their employees convert their retirement savings into an income stream that will minimize the chance of running out of money in retirement.”

Reach out with questions.

TDFs have changed substantially since their inception. They have transformed the way millions of Americans save for retirement, offering a simple and effective solution for a complex and important goal. More changes are likely as the TDF landscape continues to evolve. Staying on top of changes and best practices on how to use them as an employer is vital — especially since they are the default way many investors and businesses plan for retirement.

As always, reach out to your 1834 team with any questions.

¹ Sway Research: https://static1.squarespace.com