It’s an interesting time for plan sponsors given factors such as the DOL fiduciary rule, falling prices across the industry and emerging options within target date funds such as ETFs as underlying investments. Whether it’s for a new mandate or part of a regular, ongoing evaluation of the investment offerings within a retirement plan, there are a number of questions that plan sponsors may want ask their TDF providers.
Consider these seven:
Is the TDF glide path a good fit for my plan’s demographics? Don’t evaluate a glide path without overlaying it with the demographics of the participants you’re serving. Ask your provider how they can help assure your plan’s employee base is a good fit for their TDF allocation. And since demographics shift over time, this is a question that should be factored into your regular TDF evaluation process.
How will the TDFs protect my older employees in down markets? Understand what you are exposing your participants to during what is arguably the most sensitive period of a glide path — as retirement approaches. It’s the time when participants are most likely to react emotionally in volatile or down markets, and subsequently when your fiduciary risk may run highest. Make sure you’re making a conscious and deliberate decision about risk exposure as the glide path nears the target date. And, be sure to consider not only high level equity or fixed income allocations, but also allocations to more volatile sub-asset classes such as emerging markets equity or high yield bonds.
What asset levels are required to access your low cost TDFs? Everyone knows that cost matters. Even among providers known for delivering great value, there can be considerable differences in the minimums required to access their low-cost TDFs. If your plan is on the smaller side, look closely at minimum investment requirements across fund managers. Don’t assume a manager’s reputation for low cost means you can’t do better for your plan. Some firms have minimums as high as $100 million to get their best fund pricing, while other major providers have no minimums for qualified plans. Also, look beyond only mutual funds and consider collective investment trust funds, which are increasingly available at low or no minimums, allowing you to further reduce cost.
Is the TDF all active, all passive, or both? Regardless of implementation, remember there is no truly passive TDF. All TDF providers take what is essentially an active approach with their glide path construction and underlying asset choices. Even selecting an underlying index for a passive fund is an active choice. As a result, consider closely the elements of what goes into your TDFs — what categories they span and how they get exposure to those categories. Understand the pros and cons of all-active, all-passive and hybrid approaches.
What is the process for selecting and removing the underlying active funds, and has it ever been enacted? Has the TDF provider ever replaced an underlying strategy? It’s one thing to say there is a process; it’s another to act on it. If there have never been any changes to the underlying funds in your plan’s TDFs, evaluate whether they’re still holding the right funds. If every asset class is covered by an actively managed fund that is managed in-house by the TDF provider, consider if in fact each one is the best choice for your plan.
How much security overlap is there among holdings in the underlying active funds? If, for example, your TDFs only include proprietary funds managed by the same TDF provider, your vulnerability to overlap — particularly with active funds — may run higher as there may be a single CIO and a more narrow range of views informing the funds.
What is the portfolio management tenure and assets of the underlying strategies? Consider whether each underlying strategy would pass your own plan’s selection criteria. If you wouldn’t add a strategy to your core line-up, it may not be right for your TDF either.
Every plan has different needs, of course. These questions are guideposts for how to begin an evaluation process. It’s also worth noting that plan consultants can play a critical and beneficial role in helping with all aspects of plan design including the evaluation and selection of the TDF family most appropriate for your plan’s participants.
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