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Target Date Funds Growing as Share of Pension Investments


     By ERISA Benefits Consulting, Inc. ERISA, Pensions, Fiduciary Liability, Group Life/Health Plans, & Labor Relations Expert Witness

PhoneCall Mark Johnson, J.D., Ph.D. at (817) 909-0778


Expert Witness: ERISA Benefits Consulting, Inc.
Pension plan participants are gradually shifting savings into target date funds (“TDFs”) designed to match their age and investment needs with their ultimate retirement savings goals.

Almost one fifth (18.4 percent) of defined contribution assets in the largest 1,000 retirement plans are now invested in target date funds, according to a recent survey published by Pensions & Investments.
A target date fund typically considers a plan participant’s age and retirement date when determining the best asset allocation between stocks, bonds, real estate investments, and other types of investment options. A target date fund name often includes the target retirement year, such as a “2050 Target Retirement Fund.”

TDFs are gaining popularity with plan sponsors for younger pension plan participants, who are typically better positioned to take advantage of the enhanced returns available from equities over the long term. Younger investors are also better able to withstand the risks associated with stock market fluctuations.

A “glidepath” built into the design of a target date fund determines the asset allocation over an investor’s lifecycle. Young investors (aged 25 to 40) may have a portfolio that is 90% invested in U.S. and international equities, with a gradual reduction in equity levels through a mid-life stage of age 40 to 65, followed by early retirement (65 to 72) and then late retirement (72 or older). By the time a target date fund investor enters their 70s, the equity portion of their fund is most likely at the 30 percent level.

Industry observers offer several reasons for the growth of target date funds, including the following:

• Plan sponsors are increasingly designating target date funds as one option for qualified default investment alternatives (“QDIA”) in defined contribution individual account plans, including 401(k)s

• Older investors tend to have a higher portion of their savings in “stable value” funds such as guaranteed investment certificates (“GICs”), which offer principal protection and stability in exchange for lower but less risky rates of return. As younger investors move into the market, they often seek higher levels of diversification with a longer-term acceptance of risk, return and cost.

• Investment re-enrollment programs being offered by some investment funds are favoring target date funds to better match plan participant retirement goals.

Target date funds are one of four investment strategies identified by the Employee Benefits Security Administration (“EBSA”) within the U.S. Department of Labor in a 2008 regulation relating to QDIA investments in participant-directed individual account plans. The other three QDIA options include balanced funds, professionally managed accounts, or short term capital preservation products.

EBSA also published a series of 2013 guidelines for use by ERISA plan fiduciaries that offer target date retirement funds. Plan sponsors that use TDFs as a QDIA option under Department of Labor regulations are advised to adhere to the following principles:

• Establish a process for comparing and selecting TDFs. • Create a process for the periodic review of TDFs.

• Understand the fund’s investments and how these will change over time. • Review the funds fees and investment expenses.

• Consider the use of a customized TDF fund, such as one that might incorporate a plan’s existing core funds.

• Develop effective employee communications regarding the fund.

• Review public information to independently evaluate a TDF and any associated recommendations being made by a TDF manager.

• Document the TDF selection and review process.

Advantages to target date funds are viewed as including improved asset allocation, enhanced diversification, greater investment transparency, and a more balanced risk/return ratio.

Over time, the use of target date funds is expected to increase.

ABOUT THE AUTHOR: Mark Johnson, J.D., Ph.D.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.
For specific technical or legal advice on the information provided and related topics, please contact the author.

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