Navigating the Glide Path: The 402a Fiduciary’s Guide to Managing Target Date Funds

Target Date Funds (TDFs) have become a ubiquitous and often relied-upon investment option within retirement plans. Their inherent simplicity – a single fund that automatically adjusts its asset allocation over time as the target retirement date approaches – makes them an attractive choice for many retirement savers. However, for 402a fiduciaries, the responsibility of overseeing these seemingly hands-off investments requires careful evaluation, diligent management, and a thorough understanding of their intricacies to ensure they truly serve the best interests of plan participants.  

Understanding Target Date Funds

At their core, TDFs operate on a “glide path” – a pre-determined strategy that gradually shifts the fund’s asset allocation from more aggressive, growth-oriented investments (like stocks) to more conservative, income-generating investments (like bonds) as the target retirement date draws nearer. This automatic rebalancing aims to reduce risk as participants approach retirement. The appeal lies in its simplicity: participants choose a fund closest to their anticipated retirement year, and the fund manager handles the rest. Their increasing popularity has made them a cornerstone of many retirement plan investment menus.  

The 402a Fiduciary’s Role in Selecting TDFs

While TDFs offer convenience, a 402a fiduciary cannot simply select them and walk away. Prudent selection requires thorough due diligence:

• Due Diligence in Selecting TDF Providers: Fiduciaries must meticulously evaluate potential TDF providers. This includes scrutinizing their fee structures, the design and rationale behind their glide path, their overall investment philosophy, and their historical track record of performance. Not all TDFs are created equal, and a thorough vetting process is crucial.  
• Evaluating Glide Path Design: The glide path is the heart of a TDF. Fiduciaries need to understand the shape and pace of the glide path – how quickly and to what extent the asset allocation becomes more conservative. This assessment should consider the demographics of the plan participants and whether the glide path’s risk trajectory aligns with their collective needs and time horizons.
• Assessing Underlying Investments and Diversification: While the “fund of funds” structure of many TDFs offers inherent diversification, fiduciaries still have a responsibility to understand the types of underlying investments and the overall diversification strategy employed within the TDF. This ensures that participants are not overly exposed to specific asset classes or sectors.

Ongoing Management and Monitoring of TDFs

The fiduciary’s responsibility doesn’t end with the initial selection. Ongoing management and monitoring are equally vital:

• Regular Performance Review: Like any investment option, TDF performance needs to be reviewed periodically against relevant benchmarks and peer groups. This helps identify any underperformance or potential concerns that warrant further investigation.  
• Monitoring Changes in Glide Path and Underlying Investments: TDF providers may make adjustments to their glide paths or the underlying investments within the funds. Fiduciaries must stay informed about these changes and assess their potential impact on plan participants.
• Assessing Fees and Expenses: The reasonableness of the TDF’s fees and expenses should be continuously evaluated. Higher fees can significantly erode participant returns over time, making it a critical factor in the ongoing management process.

Q: How does a 402a fiduciary evaluate and manage target date funds? A: A 402a fiduciary evaluates TDFs through thorough due diligence on providers, careful assessment of glide path design and underlying investments, and manages them through ongoing performance reviews, monitoring for changes, and assessing the reasonableness of fees.

Target Date Funds in the Context of Plan Design

TDFs often play a significant role in overall plan design:

• TDFs as a Qualified Default Investment Alternative (QDIA): When TDFs are designated as a QDIA, they offer a safe harbor for fiduciaries regarding participant investment decisions for those who fail to make an election. However, this designation does not absolve the fiduciary of their duty of prudent selection and ongoing monitoring.
• Considerations for Offering Multiple TDF Suites: Offering participants a choice of TDF providers with different glide path philosophies can cater to a wider range of risk tolerances and time horizons. However, this also increases the fiduciary’s due diligence and monitoring responsibilities.
• Communicating TDF Features and Risks to Participants: While TDFs are designed for simplicity, fiduciaries still have a responsibility to educate participants about their features, including the automatic asset allocation changes and the inherent risks associated with investing.

Evaluating TDFs as Investment Options

TDFs are a valuable tool, but their suitability for all participants should be considered:

• Assessing the Appropriateness of TDFs for Different Participant Demographics: While TDFs cater to a broad range of retirement timelines, fiduciaries should consider if the default glide path aligns with the specific demographics and average retirement age of their participant base.
• Comparing TDFs to Other Investment Choices: TDFs should be evaluated within the broader context of the plan’s entire investment menu. Offering a diverse range of options alongside TDFs can cater to participants with more specific investment preferences or risk profiles.  

How Admin316 Supports Fiduciary Oversight of TDFs

Admin316 understands the critical role of fiduciaries in overseeing Target Date Funds. We offer comprehensive services designed to support your due diligence and ongoing monitoring efforts, including:

• Independent analysis and evaluation of TDF providers and glide path designs.
• Performance monitoring and reporting on TDF options.
• Assistance in documenting your TDF selection and monitoring processes.

Ensure prudent oversight of your Target Date Funds with expert fiduciary support from Admin316. Visit Admin316.com to learn more.

Target Date Funds offer a valuable and convenient investment solution for many retirement savers. However, for 402a fiduciaries, their management requires a proactive and diligent approach. By conducting thorough due diligence during selection, implementing robust ongoing monitoring processes, and considering the role of TDFs within the broader plan design, fiduciaries can ensure these popular investment options truly serve the best interests of their plan participants on their journey towards retirement. Contact Admin316 today to explore how our expertise can support your fiduciary responsibilities in managing Target Date Funds.   Sources and related content