How to Evaluate Target-Date Funds

Employee Benefit Plan Audit | October 30, 2019 | Holtzman Partners

Target-date funds (TDFs) are one of the most popular investment options for defined contribution plans. If your plan currently offers or plans to offer these funds, you should carefully evaluate a few key items as part of your due diligence process.

The DOL Employee Benefits Security Administration offers guidance for evaluating TDFs as a plan fiduciary. Here are some suggestions from a DOL tip sheet:

Glide path—On an annual basis, review glide path performance vs. peers and the degree of tactical asset allocation. You want to determine how this compares with other options in the marketplace. Also evaluate whether a “to” or a “through” glide path best meets participants’ withdrawal expectations.

Sub-asset allocation—On an annual basis, review sub-asset allocation performance vs. a broad market-cap-weighted index and the degree of tactical asset allocation. You want to determine how the mix of size and style compares with the index.

Underlying investments—On an annual basis, review the mix of passive vs. active funds offered. For active funds, review the philosophy, process and performance of the underlying fund managers. For passive funds, review how closely they track their respective benchmarks.

Fees—On an annual basis, review changes in plan fees over the past three to five years compared with similar TDFs.

Investment performance—On a quarterly basis, review fund performance vs. both peers and a relevant benchmark. Determine which underlying funds are driving overall performance, and review the fund’s rebalancing policy.

Employee communications—On an annual basis, review both the quality and availability of fund communications. You want to determine whether the average employee has access to the information needed to make informed investing decisions.

Parent organization and oversight—Every other year, review the fund’s parent organization to determine its oversight structure, experience and tenure. Also determine if there have been any changes to key personnel within the parent organization.

An outside adviser can analyze these factors and provide a fully independent assessment of your plan’s TDFs.

Have more questions about TDFs? Give our employee benefit plan team a call at 512.610.7200—we’d be happy to answer them for you.

Our team provides the technical experience and industry depth that your team can trust.