Illustration by Gérard DuBois
“What fund suite is in your plan, and why?” Many plan
sponsors cannot answer that question about their target-date funds, says Jeb
Graham, a partner and retirement plan consultant at Tampa, Florida-based
CapTrust Advisors LLC. Sponsors need advisers’ help filling that big knowledge
gap, he says, because if sponsors do not understand their target-date funds
now, they may face legal problems as a fiduciary later. “It starts with a
consultant’s job—to educate the plan sponsor on what kind of target-date funds
they have picked,” agrees Attila Toth, a partner at Portfolio Evaluations Inc.
in Warren, New Jersey.
Asked where advisers can add the most value to helping
sponsors evaluate whether they have the right target-date funds in a plan,
Graham says, “A lot of it is educating them to what they have and whether it is
in line with what they think they have, versus what they want to have.” The
investment policy statement of many plans is silent about criteria for
selecting the target-date funds, he says. If that is the case, a sponsor first
needs an adviser’s help defining the criteria; then, an adviser plays a crucial
role in the ongoing monitoring of whether the funds consistently meet the
When plan sponsors evaluate target-date funds, performance
numbers tend to get the bulk of their attention, probably because of the
relative ease of interpreting them, says Jeremy Stempien, director of
investments at Morningstar Retirement Solutions. “I think that the most
difficult aspect for them is knowing what to look at,” he says. “They need to look
at it with a different lens than single-strategy funds. They are more-complex
Monitoring target-date funds is much more than simply
comparing a fund to some index or benchmark, says Josh Cohen, Russell
Investments’ defined contribution(DC) practice leader. “We have been moving as
an industry, and we need to continue to move, beyond just a simple benchmark
comparison and more toward performance attribution,” he says. “You need to
understand what the real drivers are.”
Sponsors also need to understand their bottom-line goals for
target-date funds. “In the past couple of years, we have seen more plan
sponsors looking at this strategically—and from a broader benefits
perspective—and making changes accordingly,” Graham says. An adviser can help the
sponsor work toward answers to key questions like, “As a committee, what is
your goal for the portfolios? What problem are you trying to solve?” he says.
For instance, a couple of his sponsor clients have moved to target-date funds
with a more conservative investment-strategy, partly so as to use these funds
as automatic enrollment defaults.
Sources spoke about five key elements to monitor in evaluating whether a plan still has the right target-date funds.