Plan Sponsors May Have False Security with TDFs

Despite the sense of confidence in target-date funds (TDFs), the data also revealed contradictory responses among a significant percentage of sponsors who are unaware or unconcerned about areas that could present fiduciary risk.

The survey shows that half of all plan sponsors are “not at all concerned” about litigation regarding target-date glide paths, yet more than 50% admitted they were not sure what their fund’s glide path is. Despite the high level of glide path uncertainty, nearly 70% of plan sponsors said they are confident their employees understand the structure and intent of TDFs.

Almost 80% of all sponsors do not monitor (or are not sure if they do), the duration of their target-date funds’ fixed income allocation.
Sixty-eight percent of all plans have a TDF, yet only 45% said a target-date fund is the best qualified default investment alternatives (QDIA) option for their employee population.
Nearly 40% of plans that have both target-date funds and an investment policy statement (IPS) do not include language in the IPS pertaining to target-date funds and their underlying funds.

“The evolution of target-date funds continues at a brisk pace, and many good and valuable refinements will undoubtedly follow in the coming years,” said Russ Shipman, senior vice president and managing director of Janus’ Retirement Strategy Group. “With Baby Boomers’ laser-like focus on retirement income, we believe interest rate risk within the fixed income allocations of target-date funds will soon get much-deserved air time and scrutiny. Just as equity bets drove material differences in 2010-dated products during the 2008 market swoon, so too could ill-advised fixed income duration profiles for near-dated target-date fund offerings in a rising rate environment.”

(Cont...)

The survey also revealed that balanced funds are perceived by plan sponsors as the best QDIA option for investment transparency and lower fees, and are on-par with target-date funds as the best choice for overall performance. While almost half of respondents indicated target-date funds are the best QDIA for their employee populations, balanced and target-risk funds were the combined second choice, with 20% of respondents indicating that these products are the best option. Additionally, 22% of plans said they would be willing to replace their target-date funds with balanced or target-risk funds to eliminate the “to” or “through” glide path dilemma.

“The affinity for target-date funds is justifiably broad and deep, but future generations of the products may continue to see increased pressure from balanced funds,” said Shipman. “Given balanced funds’ simplicity and proven track records, we have observed plan sponsors, both big and small, routinely selecting them as a QDIA.”

The survey, which has been conducted annually for five years in conjunction with Asset International, Inc., focuses on QDIA fund selection, construction, monitoring and satisfaction. It reflected comments from a cross-section of nearly 7,000 DC plan sponsors from a wide range of industries across the country, with strong representation from the large and mega plan segments. The survey was conducted via an online questionnaire from July to September 2011.