Point of View With Marcia S. Wagner, Esq.
Managing Director, The Wagner Law Group


  • How advisors can use an objective framework and an Investment Policy Statement to help sponsors conduct target date fund evaluation.

Target date funds (TDFs) have become increasingly popular in defined contribution plans. Among the reasons for the widespread interest is that they can offer, in one single investment product, an asset allocation strategy that becomes more conservative as participants approach the target date.

To participants, this approach may appear simple. But, to sponsors, it can be a challenge to evaluate and select the appropriate glidepath which is most closely aligned to participant and plan objectives.

As applied to TDF selection, we believe they should consider using an objective process for obtaining information about the TDF that enables them to not only evaluate its historical performance and fees, but also to give appropriate consideration to the role the TDF and its underlying investments might play in the plan's portfolio.

The Department of Labor ("DOL") expects plan sponsors to understand the key features of a TDF, such as its glidepath, the strategies on which they are based, and the risks they present.

Since sponsors may lack expertise with TDFs and have exposure to liability for investment losses, advisors can play a key role in helping sponsors perform the necessary review.

It's the objective, not the glidepath after retirement, that begins to provide the answers plan sponsors need when selecting a fund.

Here is how advisors can do that:

1. Select the approach: determine the objective

We believe the fund's objective is a fundamental component when making the TDF selection. It is the objective, not the glidepath after retirement, that begins to provide the answers plan sponsors need when selecting a fund. There are three primary objectives that depict, in general terms, the spectrum of TDF series objectives available: wealth maximization, stable income, and capital preservation.

2. Put the objective in action: select the glidepath and asset allocation

Both the TDF's glidepath and asset allocation should be consistent with the selected objective.
Advisors should be familiar with the level of equity exposure at the fund's starting point (with the highest growth potential and greater risk and volatility), at the target date, and at the point where the glidepath becomes most conservative (with the highest percentage of investments in fixed income).

Moreover, advisors may want to understand the rate at which the level of equities declines, as well as the rate in which fixed income investments increase within the glidepath so that they can understand the level of growth and inflation-protection the fund may offer throughout participants' careers.

For example, an appropriate choice for a plan where participants gradually draw down account balances over a period of years (and want to support inflation-adjusted spending after retirement), may be a glidepath with a high allocation to equities from the landing point and/or target date "through" the end of participants' lives.

On the other hand, a more appropriate choice for a plan whose participants have shown a pattern of withdrawal when they retire can be a glidepath that focuses on balance protection with less volatility, with the most conservative investment allocation at or near retirement.

3. Assess the TDF: review the investment strategy and implementation

The DOL expects plans sponsors to understand the TDF's investment strategy reflected by, among other things, the asset classes selected to achieve diversification. For example, a sponsor should know if asset classes other than equity and fixed income securities, such as real estate, are represented.

In addition, plan sponsors are expected to understand the manner in which the TDFs are delivered, in other words, whether the underlying investments are actively or passively managed, and whether they are strategically or tactically managed.

They should also assess the type of underlying investments, e.g., mutual funds, ETFs, collective trusts or separately managed accounts, and how those investments may impact expense ratios.

4. Develop a roadmap: Use a robust Investment Policy Statement to guide the decisions

The Investment Policy Statement (IPS) is a written statement that the DOL recommends plan sponsors use to help monitor and guide their investment management decisions.

It's a common best practice for fiduciaries to conduct periodic investment reviews in accordance with IPS guidelines and to document them in writing. Without those reviews, investment decisions may fail to meet the prudence standard required of fiduciaries.

When working with a plan sponsor on investment menu selection or changes, we suggest advisors help ensure that decisions are made in accordance with the IPS. If an existing IPS does not already include guidelines regarding TDFs, an advisor can add value by assisting the plan sponsor in developing selection and monitoring criteria for TDFs that are aligned with the plan and its participants.

The monitoring criteria can include the TDF evaluation considerations as well as the types of investments in underlying funds, among other factors. (It's important to assess underlying investments to ensure that there are no conflicts of interest for which the plan fiduciary could be held responsible).

We believe when it comes to choosing a TDF, one size definitely does not fit all. Advisors can provide a valuable service to plan sponsors by helping them develop guidelines for the plan's objectives and to align TDF selection with a glidepath, appropriate asset allocation, and an implementation strategy to help achieve those objectives.

The Wagner Law Group prepared this article. BlackRock does not represent that the information is accurate and complete, and it should not be relied upon as such. The article is intended for general informational purposes only, and it does not constitute legal, tax or investment advice on the part of The Wagner Law Group or BlackRock. BlackRock is not affiliated with The Wagner Law Group. Prospective changes in applicable law or regulatory guidance under ERISA may affect the information presented in the article, and legal counsel should be consulted concerning the impact of any such changes.

The information contained in this material is derived from third-party sources deemed reliable, but BlackRock does not guarantee the completeness or accuracy of the information. The material is provided as an educational tool and should not be considered investment advice. BlackRock cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. BlackRock is not engaged in rendering any legal, tax or accounting advice. Please consult with a qualified professional for this type of advice.

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