Can You Really Set it and Forget It?

It’s true that TDFs are powerful tools to help plan participants automatically maintain age-appropriate asset allocations over time. But it is dangerous to propagate the idea that a participant or his investment adviser should not regularly review the performance of target-date investments, says Scott Matheson, a senior director at CAPTRUST. This is true for a variety of reasons, he explains, but perhaps the most important is that all TDFs are not created equal so, like other investment options, they must be regularly reviewed for solid performance relative to similar offerings.

Matheson delved into the complexities of benchmarking and assessing target-date strategies during a panel discussion at the 2014 NAPA 401(k) Summit, hosted by the National Association of Plan Advisers (NAPA) in New Orleans. The panelists were in strong agreement that the set-it-and-forget-it mantra is ill advised, and together they called on service providers to bring more clarity to the Wild West of TDF investment monitoring.

Even the most fundamental feature of TDF products—the glide path—varies greatly, Matheson says. Some offer a to-retirement glide path that matures (i.e., substantially ramps down equity exposures) in the lead-up to a participant’s projected retirement date. Other funds, known as through-funds, are designed to carry a participant through retirement: their equity exposures remain greater at the date of retirement.

These factors may substantially impact fund performance, Matheson explains, so it is critical for participants to know which strategy they are in and which is most appropriate for their circumstances, which can change over time. Actively managed TDFs and those with an index-based approach also differ substantially, Matheson says, and a host of hybrid products have come to market.

“The complexity of these products raises the bar on the knowledge needed to asses them,” Matheson says. “So it is a big opportunity for advisers to add value to their services to have a strong framework to review them and educate participants and sponsors.”

Charles Williams, another panelist and managing director of investment services firm Sheridan Road, says not even plan sponsors fully grasp the way their TDF options stack up against those of other providers.

“Forget the participant-level education for a second. I think even at the plan sponsor level we as advisers often assume that clients know much more than they do about the design and performance of TDFs,” Williams says. “There are major problems with benchmarking, and we need to educate clients on what TDFs are expected to do—we need to stop sponsors from being surprised by the performance or underperformance of their TDFs.”

Williams says sponsors often fail to consider that their TDF strategy could be more conservative or aggressive than others—even options with similarly shaped glide paths—depending on the underlying funds and strategies. He also observes that TDFs are not static investment vehicles. Providers often make adjustments to glide paths and underlying holdings in their TDFs that can change the fund's risk and return profile.

“The fixed-income portions of target dates have been changing a lot recently,” Williams says. “Changes to the investment philosophy can of course impact the future trajectory of a participant’s holdings in a TDF, so they must be followed closely.”

Matheson and Williams both urged advisers to consult with the Department of Labor’s (DOL) “TDF Tips Sheet” from February. The DOL prepared the general guidance to assist plan fiduciaries in selecting and monitoring TDFs and other investment options in 401(k) and similar participant-directed individual account plans. Employers and fiduciaries can learn more about their responsibilities for monitoring investment options under the Employee Retirement Income Security Act (ERISA) by visiting the Employee Benefits Security Administration’s website.