Fred Reish was recently interviewed by a government agency concerning target date funds and qualified default investment alternatives. Some of the issues were:

  • What are the major concerns regarding the variation in glidepaths and asset allocations among target date fund families and funds of the same target dates (for example, 2020 funds)?
  • What are the concerns about the costs of target date funds?
  • What are the potential concerns about the long-term investment performance of target date funds?
  • What are the concerns about the appropriateness of some target date fund designs for some groups of employees?
  • How do plan sponsors select and monitor the target date funds in their 401(k) plans?

Do participants, and especially automatically enrolled participants, understand the character and risks of the target date funds into which they are defaulted?
While target date funds have resulted in significant improvement in the investment practices of many participants, these are important questions for plan sponsors to ask about the target date funds and default investments in their plans. Plan sponsors are now learning that they need to prudently select and monitor the target date funds, as with all other investments.

In fact, that is the moral of this story. Plan sponsors need to understand the construction and performance of their target date funds and need to make sure that they select a target date line-up that is suitable and appropriate for the demographics of their covered workforce.

Source: The Report to Plan Sponsor