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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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District Court Dismisses Investment and Recordkeeping Claims Against 401k Plan Fiduciaries

A Kentucky federal district court ruled that a participant in CommonSpirit Health's 401k plan failed to state plausible claims for breach of fiduciary duty related to the fees and performance of actively managed target-date funds and recordkeeping fee. The court first rejected the plaintiff's claim that the plan fiduciaries should have offered a passively managed target-date suite instead of a more expensive and underperforming actively managed target-date suite because "actively managed funds and passively managed funds are not ideal comparators."

Source: Erisapracticecenter.com, September 2021

TDF Usage Increases as Younger Participants Invest

The EBRI and ICI have found that participants are increasingly using target-date funds to save for retirement, especially younger participants. The new report by the two organizations found more 401k plan participants are using the funds than in the past. Fifty-one percent of 401k plan assets owned by participants in their 20s were invested in TDFs, versus 23% for those in their 60s.

Source: Planadviser.com, September 2021

Target-Date Funds: Evidence Points to Growing Popularity and Appropriate Use by 401k Plan Participants

Since 1996, the EBRI and the ICI have worked together on collecting and analyzing annual data on millions of 401k plan participants' accounts. This 21-page report analyzes 401k plan participant's use of target-date funds using year-end 2018 data from the EBRI/ICI 401k database. Key findings are summarized.

Source: Ebri.org, September 2021

Managing Inflation Within Target-Date Strategies

Target retirement strategies continue to grow as a leading default vehicle, offering professionally managed, age-appropriate portfolios that automatically rebalance to keep participants on target. However, there are key differences between providers in how each strategy manages key investment risks as they evolve in importance for participants at each stage of their careers. Inflation is one of these key investment risks that need to be managed to deliver successful retirement outcomes.

Source: Ssga.com, August 2021

Tips for Evaluating a Target-Date Fund

Since target-date funds were introduced to the Canadian market in the early 2000s, they've become the dominant investment choice for defined contribution pension plan members. The funds, which are balanced with dynamic asset mixes that adjust as members approach retirement, are offered in a series with each fund designed to offer an optimal asset mix for investors with similar time horizons to retirement. But there are key differentiating factors to consider when evaluating different TDF options.

Source: Benefitscanada.com, August 2021

Target-Date Funds: Facing Increasing Congressional, Regulatory, and Legal Scrutiny

Target-date funds have become a very popular investment option on participant-directed defined contribution plan investment lineups. But, as TDFs have grown in popularity, there are signs of increasing scrutiny around TDFs used in participant-directed defined contribution plan investment lineups. This increasing scrutiny is expected to raise new regulatory initiatives generating new questions and may favor increased process review by ERISA plan fiduciaries.

Source: Morganlewis.com, July 2021

Many 401k Investors Don't Use Target-Date Funds the Right Way

Target-date funds have ballooned in popularity over the past 15 years, yet many investors aren't using them the way they were intended. The funds were designed as a one-stop-shop that put retirement savings on autopilot. Investors are meant to park their nest egg in one fund, generally based on their retirement year, which automatically shifts from stocks to bonds over time. However, a third of investors aren't limiting themselves to one target-date fund, according to 401k data from Vanguard. They're piling other funds on top.

Source: Cnbc.com, July 2021

2021 Target-Date Fund Survey

In the past decade, and particularly since the passage of the Pension Protection Act of 2006, asset allocation funds -- which include target-date funds -- have exploded both in terms of the number of products and assets amassed. They have also become more customized. This Target-Date Fund guide endeavors to present information about these funds and providers in an easy-to-use format for quick reference.

Source: Plansponsor.com, June 2021

Target-Date Funds: A 'Time Bomb' in a Retirement Tool for the Masses?

A congressional committee has asked the GAO to investigate target-date funds. Ron Surz calls TDFs a "time bomb," saying they hold too much risk near the target retirement date. But many believe TDFs are a valuable tool to help inexperienced investors build sensible retirement portfolios.

Source: Thinkadvisor.com, June 2021

Contributions to TDFs Fell As the Market Rebound Increased Assets

A Morningstar report has found retirement savers' contributions continued to suffer even as the markets rebounded from last year's volatility. The findings were reported in Morningstar's 2021 "Target-Date Strategy Landscape Report," which said flows into target-date funds and collective investment trusts sank to $52.3 billion last year, a 59% decline from the previous year.

Source: Plansponsor.com, May 2021

The Latest Attack on Target-Date Funds

"The Unintended Consequences of Investing for the Long Run: Evidence from Target Date Funds," is a new academic investment paper. The paper, by Massimo Massa, Rabih Moussawi, and Andrei Simonov, fiercely criticizes its subject. The authors find that target-date funds underperform other funds to a "staggering" degree. This shortfall occurs because target-date funds "exploit" their relatively captive audiences, which are unlikely to punish subpar returns by redeeming their shares. For a similar reason, target-date funds also get away with "fee skimming."

Source: Morningstar.com, May 2021

DOL Assessing Guidance on Private Equity in TDFs

Amid ongoing questions surrounding the use of private equity investments in professionally managed funds within 401ks, a senior DOL official confirmed that the department is conducting stakeholder outreach to assess the issue.

Source: Napa-net.org, May 2021

Congressional Leaders Call for GAO Review of TDFs

The Chairpersons of two of the leading retirement plan committees in Congress are calling for a review of target-date funds. Sen. Patty Murray, Chair of the Senate Committee on Health, Education, Labor & Pensions, and Rep. Robert Scott, Chairman of the House Committee on Education & Labor, have written to the head of the Government Accountability Office, asking them to conduct a review of target-date funds.

Source: Napa-net.org, May 2021

CITs Approaching Half of Target-Date Assets

Collective investment trusts are on pace to overtake mutual funds as the dominant target-date vehicle, data from a Morningstar report published today show. CITs represented 43% of target-date assets at the end of last year, up from just 18% in 2014, according to Morningstar's Target-Date Strategy Landscape report. Assets in those investments surpassed $1 trillion last year, reaching about $1.18 trillion, compared with $1.57 trillion in target-date mutual funds.

Source: Investmentnews.com (registration may be required), March 2021

Evaluating Target-Date Funds Is a Fiduciary Responsibility

Many fiduciaries responsible for selecting their 401k plan's target-date funds don't understand how these funds work. The risk of staying ignorant is increasing. Lawsuits challenging target-date fund selection are on the rise, and plan fiduciaries need to be able to defend their choices in response to these suits. New products, such as target-date funds that provide lifetime income options or make private equity investments are becoming available. For all of these reasons, if target-date funds are included in a plan's investment menu, fiduciaries need to develop a prudent process for evaluating the funds in partnership with their investment professionals.

Source: Cohenbuckmann.com, March 2021

Target-Date Funds Continue Their 401k DC Plan Domination

Little surprise, target-date funds are a popular choice for 401k plans' investment lineups, especially among younger participants. An updated study from the Investment Company Institute and the Employee Benefit Research Institute found that younger 401k plan participants have large allocations to target-date funds, being both more likely to hold target-date funds than older participants.

Source: 401kspecialistmag.com, March 2021

Understanding TDF Glide Paths

Glide paths aren't just a change in equity and fixed income allocations, there are changes to investment types, too. Understanding how a TDF's glide path works -- how equities and fixed-income-type investments shift as investors age -- is necessary for DC plan sponsors to fulfill their fiduciary duties in fund selection and monitoring plan investments.

Source: Plansponsor.com, February 2021

What to Consider When Selecting a QDIA

When selecting a QDIA, there are many variables to consider. This paper is the third in a series of papers and presents the perspectives of managed accounts providers and target-date fund providers as well as investment consultants and ERISA counsel where relevant. The paper poses several questions that a typical committee might ask when evaluating a QDIA, whether the QDIA is a professionally managed account program or one composed of target-date funds.

Source: Ymaws.com, November 2020

Target-Date Funds: Strategic and Active Management

Because they're targeting results over the long term, target-date funds are inherently strategic, but active asset allocation management may be a useful tool to add incremental sources of return over time. The article looks at the differences between strategic and active asset allocation and the roles these investment styles play in target-date funds.

Source: Jhinvestments.com, October 2020

Are Target-Date Funds a Good Choice for Your 401k?

Nearly every retirement plan offers target-date funds as investment options. But are target-date funds a good choice? The age-based method of setting your asset allocation makes sense in some cases, but investors can also stay in a target-date fund too long. Put another way, if your financial situation has evolved, shouldn't your investment strategy? Here's how to decide if target-date funds are a good choice for your retirement account.

Source: Forbes.com, July 2020

Avoid Manager Concentration Risk With an Open-Architecture Target-Date Fund

As ERISA fiduciaries, plan sponsors are required to offer participants a menu that's diversified by investment type, but most defined contribution plan sponsors go further and diversify by an investment manager, too. Why? Because they recognize that different managers have different, often complementary, strengths. Yet that way of thinking doesn't always extend to a sponsor's choice of a target-date fund manager, which may expose participants to manager-concentration risk.

Source: Jhinvestments.com, July 2020

Three New ERISA Lawsuits Bash Actively Managed TDFs

A participant in Costco's retirement plan filed a lawsuit claiming the fiduciaries of the plan breached their duties under ERISA by authorizing the plan to provide inappropriately expensive and underperforming active management funds. Similar allegations are echoed in three new lawsuits filed this week against Quest Diagnostics, IQVIA Holdings, and Eversource. All three suits question the use of actively managed funds provided by Fidelity, although the asset manager is not itself named as a defendant in any of the complaints.

Source: Planadviser.com, July 2020

Rethinking the Role of Fixed Income Along the Retirement Savings Journey: From Theory to Practice

This paper takes the retirement savings journey from theory to practice by sharing views on how fixed income should evolve across a TDF glide path, exploring both the absolute level of the fixed income allocation and its composition in terms of fixed income sub-asset classes.

Source: Mfs.com, June 2020

Target Retirement Date Funds in Q1 2020

Most exchanges done by target-date investors during the first quarter were done by older participants in vintages closest to retirement. Many factors may be behind this behavior, including investors closest to retirement have larger balances and are more concerned with sequencing risk; older investors have potentially greater experience with market selloffs, or simply those closest to retirement may be naturally "spooked" by volatility spikes. This participant behavior is worrisome to many market observers, as participants who deviated the most from their strategic allocations were those with the largest account balances and the shortest investment horizons.

Source: Fiallc.com, May 2020

COVID-19 Market Tests Basic TDF Design

Target-date funds saw negative returns across the board during the first quarter, but those with aggressive stock allocations at their target dates hit those nearing retirement hardest, according to a report from Morningstar.

Source: Investmentnews.com (registration may be required), May 2020

Are Your Target-Date Funds a Prudent Investment? COVID-19 Puts Spotlight on Fiduciary Choices

COVID-19 may have accelerated a reckoning for fiduciaries who have not fulfilled their responsibilities for target-date fund selection. Those who simply selected their vendor's funds without investigation and financial firms that selected their proprietary funds for their plans, especially funds without good track records, are probably most at risk. However, fiduciaries with exposure can begin to reduce that exposure by reviewing their selections and implementing a prudent review process. Here are some questions frequently asked about target-date fund selection.

Source: Cohenbuckmann.com, April 2020

Near-Retirement Target-Date Investors Show Signs of Stress

Target-date fund investors have a reputation for shrugging off the short-term stock market volatility, but as the coronavirus-driven sell-off accelerated in March, near-retirees saw an unusual amount of selling activity. Investors within 15 years of retirement pulled more than $9 billion in March.

Source: Morningstar.com, April 2020

Judge Moves Forward Suit Over Walgreen Plan TDF Mismanagement

In a concise order, U.S. District Judge Charles Ronald Norgle of the U.S. District Court for the Northern District of Illinois has declined to dismiss a lawsuit alleging fiduciaries of the Walgreen Profit-Sharing Retirement Plan breached their fiduciary duties by selecting and retaining poorly performing target-date funds for the plan. The judge rejected the defendants' argument that the complaint cannot be based solely on the funds' underperformance but must contain more specific allegations.

Source: Plansponsor.com, March 2020

Market Plunge Tests Performance of Target-Date Funds

If the recent correction is any indication, many of the target-date funds for people close to retirement might be less risky than such products were in 2008. On average, target-date funds with a 2020 vintage had negative returns of 4.1% between Feb. 24 and Feb. 28, according to data from Morningstar Direct. Meanwhile, funds with target years of 2030 had negative returns of 6.3%, and those dated to 2050 returned -9.2%. During that time the Dow Jones Industrial Average dropped by 12%.

Source: Investmentnews.com (registration may be required), March 2020

Vanguard Cements Its Hold on the Target-Date Marketplace

The trend toward lower costs in retirement plans has benefited products across the industry, but Vanguard gobbled up even more of the target-date fund market last year and is nearing $1 trillion managed in those products, according to a report from Sway Research.

Source: Investmentnews.com (registration may be required), March 2020

Choosing Target-Date Funds: A Suitability Assessment

The choice of a target-date fund should be influenced by a range of participant characteristics and behaviors, as well as plan sponsors' objectives for the plan and their investment philosophies. Plan sponsors and their advisors/consultants should think carefully about the list of considerations provided here and document the decision-making process leading to their TDF choices.

Source: Jpmorgan.com, February 2020

Target-Date Funds and Portfolio Choice in 401k Plans

Target-date funds in corporate retirement plans grew from $5B in 2000 to $734B in 2018, partly because federal regulation sanctioned these as default investments in automatic enrollment plans. This paper shows that adopters delegated pension investment decisions to fund managers selected by plan sponsors. Including these funds in retirement saving menus raised equity shares, boosted bond exposures, curtailed cash/company stock holdings, and reduced idiosyncratic risk. The adoption of low-cost target date funds may enhance retirement wealth by as much as 50 percent over a 30-year horizon.

Source: Upenn.edu, January 2020

Target-Date Funds: Blend Is the Trend

Over a third of defined contribution plan sponsors offer both active and passive funds on their core menus, representing 52% of total DC core menu assets. Yet, target-date funds that blend the two have historically garnered limited attention, not due to lack of interest, but because of limited product offerings. However, that is changing.

Source: Pimco.com, January 2020

Participants Invested in TDFs Contribute Less to Retirement Accounts

Retirement plan participants who invest in target-date funds contribute less to their plans than participants who don't use them, an analysis from Alight Solutions finds. This surprising actions from retirement plan TDF investors offer lessons for plan sponsors and indicate a need for more innovation in TDF design.

Source: Plansponsor.com, October 2019

Five Lessons Packaged Target-Date Solutions Can Learn From Customization

Selecting a target-date solution is a fiduciary act, and plan sponsors must work through the distinctions between custom and packaged approaches in order to decide which is the better fit for participants in their own plans. However, the choice isn't necessarily black and white. Here are five principles that can raise the bar for packaged target-date solutions.

Source: Alliancebernstein.com, October 2019

A Prudent Approach to Evaluating Target-Date Funds

Newport Group's Fiduciary Consulting practice has developed a robust methodology for evaluating and monitoring target-date funds. It is designed to be a prudent process that lives up to the rigorous demands of ERISA. This paper describes the details behind our evaluation and monitoring process, and provides an understanding of why such specialized due diligence is essential for target date strategies.

Source: Newportgroup.com, September 2019

Target-Date Funds Can't Escape Fee Compression

Fee compression in target-date funds persists unabated as assets in target-date funds continue to grow at a rapid clip and remain concentrated in a handful of asset managers. Increased fee sensitivity compels target-date asset managers and retirement plan consultants to consider new options for product development.

Source: Cerulli.com, September 2019

Why 401k Target-Date Funds Are "Struggling"

Target-date funds may be the go-to allocation for most 401k sponsors and participants, but there's one area they can't seem to figure out—fee compression. It's an ongoing, and increasing, problem fueled by a concentration of assets in a handful of managers and a rapid rise in inflows.

Source: 401kspecialistmag.com, September 2019

Target-Date Funds May Not Play Well With Others in Defined-Contribution Plans

Target-date funds are designed to simplify investing for participants in defined-contribution plans, especially in plans that use them as the default investment. However, participants sometimes combine target-date funds with other investment-plan options, thus becoming what's known as mixed target-date fund investors. While combining target-date funds with other investments may not seem problematic at first glance, it can diminish -- or even eliminate -- the target-date fund's potential benefit.

Source: Morningstar.com, September 2019

Another TDF Targeted With Fiduciary Suit

Another set of plaintiffs have filed suit about the target-date fund choices on their former employer's investment menu. The suit, filed in the U.S. District Court for the Middle District of Tennessee, was brought by Becky Kirk, Perry Ayoob and Dawn Karzenoski on behalf of the CHS/Community Health Systems, Inc. Retirement Savings Plan, which, as of Dec. 31, 2017, had $3.2 billion in assets and about 112,700 active participants.

Source: Napa-net.org, August 2019

ERISA Complaint Questions Alternatives Use in Custom TDF

As it awaits the results of a Supreme Court appeal on another case scrutinizing its investment decisions, Intel Corporation now faces an additional lawsuit questioning the fees and performance of custom target-date funds offered to its defined contribution retirement plan participants.

Source: Planadviser.com, August 2019

Walgreen Sued for Keeping Underperforming TDFs in 401k

A group of current and former participants in the Walgreen Profit-Sharing Retirement Plan, individually and as representatives of a class of participants and beneficiaries of the plan, have filed a lawsuit on behalf of the plan for breach of fiduciary duties under ERISA. Despite a market "teeming with better-performing alternatives," the plaintiffs say, Walgreen selected the Northern Trust Funds, which already had a history of poor performance.

Source: Planadviser.com, August 2019

Walgreens Hit With $300 Million 401k Lawsuit Over Target-Date Funds

Walgreen Co. has been hit with a lawsuit alleging its "imprudent" decision to keep certain target-date funds in its 401k plan caused employees to lose $300 million in cumulative retirement savings. Plaintiffs claim the Northern Trust funds led to a "swift and devastating blow" to participants' retirement savings.

Source: Investmentnews.com (registration may be required), August 2019

Are Your Target-Date Funds a Lawsuit Waiting to Happen?

Target-date funds may be the ticking time bomb of ERISA litigation. If fiduciaries have any doubt that these funds are in the crosshairs, they should take a look at the website of litigation firm Cohen Milstein, which has a whole section titled "Investigation of Target-Date Fund Investments." Cohen Milstein says it is looking at four factors.

Source: Cohenbuckmann.com, August 2019

CIT Target-Date Assets Surging as Mutual Funds Hit by Outflows

Though some target-date managers are seeing net outflows from their mutual fund-based products, they are counting on their collective investment trust-based target-date businesses to pick up the slack. The target-date managers are capitalizing on growing interest among plan sponsors for CITs, which boast lower costs, greater flexibility and fewer regulatory/administrative requirements.

Source: Pionline.com, August 2019

How Target-Date Defaults Affect Equity Allocation Exposure

The economic consequence of different defaults in defined contribution plans is significant, according to a new report by the TIAA Institute. TIAA finds that participants who joined plans post target-date defaults tend to have a greater percentage allocation to equity. And because so many allocate to the same type of fund, there is less cross-sectional variation in equity percentage for this group, according to the report. By contrast, those who joined under a money market default tended to customize their portfolios and there is a substantial cross-sectional variation in the equity percentage of their allocations.

Source: Napa-net.org, June 2019

The Effect of Default Target-Date Funds on Retirement Savings Allocations

Defined contribution retirement plans are the primary retirement savings vehicle for most American workers, and many of these plans now use target-date funds as their default investments. Previously, money market funds were the most common default. Retirement plans today also tend to offer more investment options than were available in the past. This study examines how these changes have affected plan participants' contribution allocations and equity exposure, based on a 2012 cross section of more than 600,000 TIAA participants.

Source: Tiaainstitute.org, June 2019

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