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Rethinking How You Monitor and Communicate About Target Date Funds

Exercising the fiduciary duties of prudence and disclosure regarding target date funds (TDFs) can be challenging, and a white paper by Richard Glass of Investment Horizons, Inc. discusses the issues 401(k) fiduciaries face and provides suggestions for addressing them. 

In “Does Your Approach to Monitoring and Communicating Your Target-Date Funds Need Rethinking?” Glass argues that Congress’ assumption that generally accepted investment principles and modern portfolio theory (MPT) are widely accepted and understood, and the Department of Labor’s ambiguity on selecting and monitoring TDFs, have resulted in: (1) inconsistency in how information is provided about them, and (2) participants receiving incomplete information. 

Worse, Glass says, unless the problems Congress and the DOL have created are addressed, fiduciaries will set their participants up for what he calls “a dire lack of retirement security,” and that it will put fiduciaries at risk of being subject to class-action lawsuits pursued by retirees and current 401(k) participants due to fear that they will not have sufficient funds for retirement. 

The paper argues that there are no generally accepted investment principles that are being used universally to create TDFs, and that the foundations of MPT seem to be based on data mining and not rigorous science. 

Glass argues that fiduciaries must monitor whether or not their TDFs are actually enhancing or even reducing their users’ chances of achieving a financially secure retirement. Assessing participants’ retirement readiness, he says, provides critical knowledge that will help a fiduciary understand the effect of a volatile market on their accounts. 

The paper also says that 401(k) fiduciaries must accept the fact that selecting and retaining (or not) TDFs requires the fiduciaries to understand whether or not their choice of TDFs is contributing to the participants’ retirement security, as well as what needs to be communicated to enable the participants to help themselves. 

And the onus is not just on fiduciaries, the paper says: it also argues that employees must understand the role they play in achieving their own retirement security. To that end, it suggests that well-designed gap analyses are effective ways to change participant behavior and that such personalized reports provide participants with the information they need, and in a manner they want and in a helpful format.

John Iekel is Senior Writer and Editor for the ASPPA Net and NTSA Net portals.