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COLLECTED WISDOM™ on Target-Date Funds

Target-Date funds have become popular with 401k plan sponsors, vendors and participants, but choosing the appropriate target-date fund for a plan is not easy.

This archive contains not only the most current material on the topic, but also older items that are still relevant, provide background, perspective or are germane to the topic.

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Milliman Manages a Win in TDF Fiduciary Breach Suit

This suit was filed in January 2022 and made several allegations regarding practices by the fiduciaries of the Milliman, Inc. Profit Sharing and Retirement Plan. At issue was a suite of target risk funds. Those funds were put in the plan menu in 2013, but the suit comments that "having only been launched in November 2012, the Unified Funds were brand new, had no investment track record, and were untested."

Source: Napa-net.org, June 2024

Fidelity, Voya and BoA Smooth Blackrock's Launch of Guaranteed-Paycheck ETFs

With a friendly Fidelity boost, BlackRock is off to a flying 401k start with its launch of a best-of-both-worlds pension product that combines a target-date ETF with an annuity, but its opacity and complexity could give investors pause. The $10.5 trillion New York City asset manager's LifePath Paycheck is a "new generation" ETF target-date product that includes an option to purchase a lifetime income stream (i.e. annuities) from BlackRock-selected insurers.

Source: Riabiz.com, May 2024

We Need New Department of Labor Guidance on Target-Date Funds: GAO

Target-date funds started strong only to vary more in investment performance and risk as they approach the specified retirement date, according to the Government Accountability Office, which asked the DOL to do something about it. The GAO called on the DOL to update its TDF guidance, which is over a decade old.

Source: Napa-net.org, May 2024

DOL Final Fiduciary Rules Could Resolve Conflicting Interests in Target-Date Funds

Target-Date Funds have three interest groups: investment managers, fiduciaries, and beneficiaries. The interests of these three groups are not aligned, but the new DOL fiduciary rules could change that. Ron Surz warns TDF participants will be the big losers in the next market correction unless they start using personalized target-date accounts.

Source: 401kspecialistmag.com, April 2024

Advanced Recordkeeping Technology Allows for More Personalization in TDFs

While target-date funds have become commercially successful and are often the default investment vehicle in retirement plans, they have also received flack for not being sufficiently well diversified and that a glidepath with declining equity allocations over time is not optimal for all participants. However, according to a recent paper by T. Rowe Price in The Journal of Portfolio Management, as recordkeeping technology continues to evolve, there is increasingly more opportunity for target-date funds to become more personalized, down to the participant level.

Source: Plansponsor.com, April 2024

New Wave of Annuities in TDFs: "It's Complicated"

A new wave of target-date funds featuring annuities is here, and the question of whether this combination has the potential to be the "easy button" for retirement income is explored in new research from Morningstar.

Source: 401kspecialistmag.com, April 2024

QDIA Update: Essential Insights and Emerging Trends

Target-date offerings continued to garner the lion's share of defined contribution assets and are now estimated to make up over 40% of the assets in 401ks. Personalized target-dates and dual-default solutions blending target-dates and managed accounts have evolved. Managed account solutions continue to see increased adoption by Plan Sponsors, but participant utilization remains low.

Source: Fiducientadvisors.com, April 2024

CITs Dominate Investment Strategies for 2023

A new Morningstar report is doubling down on its prediction that collective investment trusts will overtake mutual funds in 2024. The firm's latest Target-Date Strategy Landscape Report found that in 2023, 67% -- or $104.5 billion -- of net inflows into target-date strategies went into CITs, for a total of $156 billion. Net flows increased year-over-year, for a record high of $3.5 trillion.

Source: 401kspecialistmag.com, March 2024

Fiduciaries Incite Revenge of the Baby Boomers

The author suggests that "The next time target-date funds suffer large losses, Baby Boomers won't care that risk was rewarded until it wasn't. They'll be angry that academic theory was not followed because the theory would have protected them. After all, TDFs say they follow the theory, but they don't, they're much riskier. 78 million Boomers are currently in the 'Risk Zone.' Many are in TDFs."

Source: 401kspecialistmag.com, March 2024

TDFs Continue as Leading Investment Vehicle in DC Retirement Plans

New findings today from the NEPC show that target-date funds remain the dominant investment option among DC plans. The organization's latest Defined Contribution Plan Trends and Fee Survey, which surveyed 128 clients representing $259 billion in aggregate assets and 2.6 million plan participants, reports that 86% of respondents currently offer a TDF paired with systematic distributions to their participants. Ninety-seven percent of clients offer target-date fund options, and 96% use the vehicle as the qualified default investment alternative.

Source: 401kspecialistmag.com, March 2024

401k Managed Account Users Out-Saving TDF Participants

Retirement plan participants utilizing managed accounts are out-saving non-users and participants utilizing a single target date fund, according to data from Edelman Financial Engines. During the past decade, the savings rates of EFE managed account users have consistently averaged higher than non-users.

Source: 401kspecialistmag.com, February 2024

Are Target-Date Funds a Recipe for Manager Abuse?

Innovation in the retirement plan space is revolutionizing saving and investing, leading to better outcomes and better participant behavior. Target-date funds are no exception, making it easy for workers to stay the course through market shocks, in particular. But are some fund companies -- and their managers -- taking advantage of investor apathy for their benefit?

Source: Napa-net.org, January 2024

Target-Date Fund Theory and Evidence

TDFs say they follow the academic lifetime investment theory, but they are much riskier at the target date than this theory. Ron Surz argues that 401k participants are not getting the protection that academic lifetime investment theory prescribes and are therefore much less protected than they should be near retirement.

Source: 401kspecialistmag.com, November 2023

TDF Assets Through Q3 Dip Slightly, Still Outpacing '22

Assets in target-date funds through the third quarter of 2023 ended down from Q2 but are still on pace to exceed those of a relatively down year in 2022, according to the latest data from ISS Market Intelligence's Simfund.

Source: Planadviser.com, October 2023

The Game is Changing for Target-Date Funds

In Target-Date fund providers struggle to compete, Pensions & Investments reports: "More fund closings, fewer launches as five giant firms maintain grip on market. The target-date fund market is becoming saturated, causing providers to liquidate... in an industry dominated by five companies with nearly 80% of the market share."

Source: 401kspecialistmag.com, October 2023

Target-Date Funds: Low Fee Doesn't Equal Low Risk

Passive target-date funds remain a popular choice for many defined-contribution plans, often driven by the generally lower fees associated with these funds. While intuitively it may feel as if "lower cost" naturally translates into a more prudent option for plan participants, the reality is this may not always be the case. Here are three reasons why passive TDFs aren't automatically the safer choice for DC plan fiduciaries.

Source: Investmentnews.com, October 2023

Judge Dismisses Another 401k Suit Involving BlackRock TDF Funds

Another in the series of suits alleging that plan fiduciaries "chased low fees" and ignored investment performance has been dismissed, though there was a unique twist here.

Source: Napa-net.org, October 2023

Report Calls for More Illiquid Assets in DC Plans' Target-Date Funds

Diversifying target-date funds by incorporating illiquid assets -- such as private equity, real estate, and infrastructure -- could result in a 0.15 percent annual increase in return over a decade, according to a recent report by Georgetown University's Center for Retirement Initiatives.

Source: Benefitscanada.com, August 2023

Why the Biggest Target-Date Funds Have Underperformed

Morningstar tracks 53 target-date fund series, run by 29 companies. Among that group, the two largest families dominate, as Vanguard and Fidelity manage more than half the industry's target-date fund assets. Unfortunately, the returns of both families' target-date funds have trailed those of their balanced funds. Had target-date funds never been invented, and Vanguard and Fidelity had instead placed their 401k shareholders into their existing balanced funds, those investors would be significantly wealthier today.

Source: Morningstar.com, August 2023

Dismissal Streak Continues in BlackRock Target-Date Fund Litigation

A third district court has dismissed with prejudice a complaint alleging that defendants breached their fiduciary duties under ERISA by offering 401k plan participants the option to invest in BlackRock LifePath Index Target-Date Funds. Although the outcome of the court's ruling here is consistent with earlier decisions, the rationale underlying the Beldock decision arguably goes further than in prior rulings, thus providing additional food for thought.

Source: Erisapracticecenter.com, May 2023

Retirement Advisers Say Long-Term Performance Most Important for Evaluating TDFs

When evaluating a target-date fund, retirement advisers consider long-term investment performance to be the most important factor, with 80% saying it was very important, according to Cerulli Associates research. The second most important factor when considering TDFs is cost, which 76% of advisers consider very important. This was followed by 70% of advisers marking the diversification of underlying asset classes as a very important factor.

Source: Planadviser.com, April 2023

Two BlackRock TDF Suits Seek to Appeal Federal Court Losses

Plaintiffs in two of the recently dismissed suits involving the BlackRock LifePath target-date funds have announced their intentions to appeal those losses.

Source: Napa-net.org, April 2023

CITs to Overtake Mutual Funds as Most Popular Target-Date Vehicle Within Two Years

Target-date strategies had $153 billion of net inflows in 2022, of which $121 billion (79%) went into collective investment trusts, furthering the transition from mutual funds as the preferred vehicle for target-date funds. That's a key finding from Morningstar's recently released annual Target-Date Strategy Landscape Report, which examines the latest trends across the target-date industry.

Source: 401kspecialistmag.com, April 2023

2022 Was Rough Year for Near-retirees in Target-Date Funds

Last year was a difficult one for mutual funds and ETFs generally, but a category of all-in-one products that serve as the backbone of 401ks -- target-date funds -- offered almost no shelter for people on the cusp of retirement. While stock and bond allocations hurt the performance of TDFs last year, fees declined and assets flowed to collective investment trusts, Morningstar found.

Source: Investmentnews.com, March 2023

CITs to Overtake Mutual Funds in Battle for Target-Date Assets

Lower-cost collective investment trusts continue to eat away at mutual funds' hold on target-date funds and are expected to be the primary target-date vehicle in 2023, a new report suggests.

Source: Napa-net.org, February 2023

Microsoft Escapes Retirement Plan TDF Suit

A U.S. District Court judge on Tuesday dismissed a lawsuit against Microsoft Corporation claiming that the BlackRock LifePath Index Funds suite of target-date funds was an imprudent investment choice for Microsoft's retirement plan participants.

Source: Planadviser.com, February 2023

Another BlackRock TDF Suit Dismissed

Another of the suits challenging plan fiduciaries' retention of the BlackRock LifePath target-date funds has been dismissed, but with an opportunity to remedy its shortcomings. This one had been filed against Microsoft back in August, alleging, that the plan fiduciaries "…employed a fundamentally irrational decision-making process (i.e., inconsistent with their duty of prudence) contrary to basic economics and established investment theory."

Source: Napa-net.org, February 2023

TDF Flows Jump 35%, but CITs Are Stealing Growth

Target-date funds continued to reign supreme among retirement savers last year, but new data shows collective investment trust funds may keep them from regaining the heights of a few years ago. Retirement savers boosted TDF contributions in 2022 at a 35% higher rate than in 2021, well off the negative flows seen in 2020 at the height of the pandemic, according to the latest data from investment research provider Morningstar.

Source: Planadviser.com, January 2023

Research Shows Workers' Poor Grasp of Target-Date Funds

The MFS Retirement Outlook 2023 survey found gaps between workers' understanding of how target-date funds work and how they function, revealing fundamental misunderstandings that require participant education. These misunderstandings can have implications for saving, investing, and living in retirement, explained Jon Barry, head of client solutions for the investment services group at MFS.

Source: Plansponsor.com, January 2023

2022 Custom Target-Date Fund Study

Over the past 15 years, target-date funds have become foundational in the defined contribution (DC) system. This study was launched in 2017, to provide insight into custom target-date fund solutions (cTDFs), including their basic structure, asset allocation, asset class exposure, and returns. 2022 is the third iteration of the study, evaluating data through year-end 2021. The analysis represents cTDF assets of $516 billion across plans with over $1.5 trillion in assets collectively. A total of 14 organizations that manage cTDFs participated in the study.

Source: Dciia.org, December 2022

Shareholder Activist Targets Target-Date Funds

The BlackRock Lifepath target-date funds have been targeted again, not in litigation, but by a shareholder activism group for their inclusion on a 401k menu.

Source: Napa-net.org, December 2022

The Great Debate: Target-Date Funds vs. Managed Accounts

On December 8, 2022, Retireholics hosted a debate on a topic that is on many people's minds in the 401k industry. Which is better: target-date funds or managed accounts? TDFs are the most popular Qualified Default Investment Alternative with MAs a distant second, but that could change with the current unraveling in TDFs.

Source: 401kspecialistmag.com, December 2022

Coming Soon to a 401k Plan Near You: Personalized Target-Date Accounts

Managed accounts are the second most popular choice of QDIA. But before you switch to a managed account you should consider an emerging disruptive innovation that combines managed accounts with TDFs, providing the better characteristics of both. We call this innovation Personalized Target Date Accounts.

Source: 401kspecialistmag.com, November 2022

Webcast: Current Trends in Target-Date Fund Litigation

Litigation of 401k plan fees and investment fund performance is on the rise. This webcast provides a review of recent 401k litigation cases, trends involving both active and index/passive target-date funds, and fiduciary best practices to avoid litigation.

Source: Fiducientadvisors.com, November 2022

Annuities as Part of Target-Date Funds Grow in Popularity

For plan sponsors considering an in-plan retirement income option, defined contribution plan consultants are most likely (68%) to recommend target-date funds with a guaranteed income component, followed by a TDF with an income vintage (50%), a new report shows. The report from Cerulli Associates finds the target-date options were followed by a managed account (36%), as the next most likely recommendation from defined contribution consultants for in-plan retirement income offerings.

Source: Planadviser.com, October 2022

New Wave of ERISA Class Actions Accuse Fiduciaries Of 'Imprudently' Using Low-Fee, High-Rated Funds, Like Blackrock TDFs

Retirement plan sponsors are fake fiduciaries if they offer cheap, highly rated funds from premium brands in 401k plans without factoring in fund performance, according to a fresh wave of ERISA class action cases. Most of the 11 outstanding class actions allege that plan sponsors chose BlackRock LifePath target-date funds as their default 401k option simply because they had the superficial markings of a fiduciary process rather than engaging in an authentic one.

Source: Riabiz.com, September 2022

Target-Date Funds and the Ever-Evolving Glidepath

In 2021 and the first half of 2022, multiple TDF providers announced changes to their strategic target-date fund glidepaths. The timing of these changes was unique, as capital markets adjusted to a post-pandemic world and a vastly different global outlook. To better understand the nature and extent of these changes, Callan leveraged the data that they gather for their proprietary TDF analytics, which allows them to track broad TDF asset allocation trends.

Source: Callan.com, September 2022

Is It a Breach of Fiduciary Duty to Include Target-Date Funds in 401k Plans?

One of the themes of many excessive fee suits is that the inclusion of particular products in plans is, in and of itself, evidence of a fiduciary breach, when the real question in such a suit, even if a product was overpriced, should be whether it was imprudent for the fiduciary to have included that product. As the cliche goes, you get what you pay for, and a plan fiduciary's job is to assemble a prudent collection of investment options, not just assemble the cheapest one possible.

Source: Bostonerisalaw.com, September 2022

CUNA's 401k Latest Targeted in BlackRock TDF Suit

The law firm of Miller Shah LLP has targeted another plan they claim "appear[s] to have chased the low fees charged by the BlackRock TDFs without any consideration of their ability to generate return." This time it's the fiduciaries of the $865 million CUNA Mutual 401k Plan for Non-Represented Employees.

Source: Napa-net.org, August 2022

More TDF Underperformance ERISA Lawsuits Filed

This summer, plaintiffs represented by the increasingly active law firm Miller Shah LLP have filed a cluster of new ERISA lawsuits. The defendants in the cases include well-known national employers across the U.S., including Citigroup, Stanley Black & Decker, Booz Allen, Capital One, Wintrust, Cisco, and Genworth. The lawsuits all include nearly identical ERISA fiduciary breach allegations against the defendants, but these allegations stand in sharp contrast to the broader landscape of ERISA litigation.

Source: Planadviser.com, August 2022

A Guide Path for Your Glide Path(s)

A recent report and a new wave of litigation remind us that all target-date funds are not designed the same. A recent Morningstar whitepaper cautioned that "through" glide paths generally include around 13 percentage points more in equity at age 65 than their peers invested in "to" glide paths, as the average "through" series holds 46% in stocks versus just 33% for the average "to" series. That makes them riskier (or at least more volatile), and potentially riskier than those who defaulted into those options may know, or desire.

Source: Napa-net.org, August 2022

Target-Date Funds: Evaluating and Selecting

The Qualified Default Investment Alternative investment decision is among the most important investment-related decisions a plan sponsor will make on behalf of plan participants. The selection of a target-date fund is likely to have the greatest impact on the largest number of participants and their ability to achieve their retirement objectives. Target-date products are relatively immune to participant inaction because they evolve as participants age. This characteristic makes target-date funds the most attractive QDIA and the most complex alternative. Because the decision is so critical, it carries major fiduciary implications.

Source: Fiducientadvisors.com, August 2022

Lawsuit Accuses Fiduciaries of Chasing Low Fees Without Regard to Performance

Microsoft Corporation is the target of a new complaint in a series of lawsuits claiming that the BlackRock LifePath Index Funds suite of 10 target-date funds was an imprudent investment choice for defined contribution plans. The lawsuits accuse the defendants of selecting and retaining "poorly-performing investments instead of offering more prudent alternative investments that were readily available at the time."

Source: Planadviser.com, August 2022

Booz Allen Hamilton, Others Face Passive TDF Performance Lawsuits

Unlike many other ERISA lawsuits, the complaints suggest the plan fiduciaries in question should have considered more expensive target-date funds that might have performed better. The lawsuit was filed in the U.S. District Court for the Eastern District of Virginia, naming as defendants Booz Allen Hamilton Inc., the company's board of trustees, and various committees tasked with operating the management and technology consulting firm's defined contribution retirement plan.

Source: Planadviser.com, August 2022

BlackRock TDF Targeted in Another Suit

Claiming that the plan fiduciaries "...employed a fundamentally irrational decision-making process (i.e., inconsistent with their duty of prudence) contrary to basic economics and established investment theory," a new suit involving the BlackRock LifePath target-date funds has been filed.

Source: Napa-net.org, August 2022

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