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Guest Article Target-Date Funds and "Glideance" CounselingBy Jeb Graham CEBS, CIMA® of CapTrust Financial Advisors, an independent consulting/advisory practice focused on the institutional retirement plan market, serving corporate, closely held, non-profit and governmental organizations. You may contact Jeb at 813.218.5008 or jeb.graham@captrustadv.com. Usage of target date funds is up 32% from last year according to data from Financial Research Corp. of Boston. And the data suggests that, over the next five years, assets in target date funds are expected to grow at an annual rate of 26%. As more and more of their plan participants invest in these "products," 401k and 403b investment committees are beginning to recognize the need for due diligence on underlying components of target date funds to comply with fiduciary obligations. We are seeing the start of a trend toward greater scrutiny of the underlying investments in the respective portfolios. Some plan sponsors have selected target date funds comprised of funds on the existing menu, making the process of analysis and monitoring much easier. Danger Ahead While the positive aspects of target date funds have been well publicized, plan fiduciaries may be unknowingly gliding into an area of risk not yet considered. If a participant in a target date fund were going to bring legal action against a plan sponsor for an inadequate accumulation of their savings account, what would the likely culprit be? Under performing investments that make up the target date funds? Maybe. Unreasonable costs? Perhaps the portfolio was made up of all proprietary funds that had higher than appropriate expenses. Enter the glidepath. I would suggest the greater liability exists for plan committees that fail to assess the difference in construction of these target date funds. In "fundspeak" a glidepath can be explained simply as the gradual decline in the equity component of the portfolio as the investor moves closer to the target retirement. And the glidepaths of the various target date portfolios are not created equal. For example, consider the significant difference in the stock/bond mix of portfolios offered by Alliance Bernstein and those of Wells Fargo. One approach is to be virtually out of equities by retirement date. The other says an individual will live on average 22 years after the target retirement, and needs equities to keep pace with inflation. A compelling argument can be made for both strategies, so it is not a question of good vs. bad or right and wrong. But a 401k plan committees better know which side it is on, and why, or the potential for risk may be significant. Managing this risk is a matter of informed decision making that is well documented. Suppose a participant reaches their target retirement date in 2025 after investing for 20 years in a portfolio specifically aimed at that year. Lets further suppose this person and their attorney perceive their account is less than others in similar accounts. It could be that the market recently had a downturn and the more aggressive portfolio lost considerable value…or it could be that the less aggressive portfolio just didn't keep up with others more heavily invested in equities. Either way, the question would be posed to the plan sponsor…"How were these target date funds selected? You should have seen that this fund was too aggressive…or not aggressive enough…in comparison to similar funds." If the investment committee of the plan sponsor documented a prudent process of evaluating alternative strategies, with a decision supported by due diligence in the analysis, either the more aggressive or less aggressive approach could be easily defended. If no such process exists, there is in my opinion, considerable potential liability to the committee for making an uninformed decision. The service providers, offering their own target date funds along with similar products from other investment providers, are going to be conflicted in any advice regarding the selection, as their objective is to sell their products and services. Having an independent fiduciary advocate to assist in creation of appropriate investment policy and in the selection of the right target date fund solution for each plan sponsor (and their participants) will likely prove to be a wise decision for plan committees. This material is distributed solely for information purposes and is not a solicitation of an offer to buy any security or instrument or to participate in any trading strategy. The views contained herein are the opinions of the author. It is not intended as legal or tax advice. CapTrust Advisors, LLC is a Registered Investment Advisor with the SEC. CapTrust is not a legal or tax advisor. Other articles by Jeb Graham: Looking Under the Hood of Your 401k to Understand the Real Costs, Does Your Organization's Retirement Plan Measure Up? and The Importance of Legal Counsel Review. ### 401khelpcenter.com is not affiliated with the author of this article nor responsible for its content. The opinions expressed here are those of the author and do not necessarily reflect the positions of 401khelpcenter.com. This article is for informational and educational purposes only and doesn't constitute legal, tax or investment advise. | ||||
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