New Guide Supplements DOL TDF Tips

The Defined Contribution Institutional Investment Association (DCIIA) has released a white paper titled, “DCIIA Guide to U.S. Department of Labor Tips on Selecting Target Date Funds.”

The paper is intended to supplement the Department of Labor’s (DOL’s) fact sheet about selecting target-date funds (TDFs) and offer additional information about the different types of products that may be available.

DCIIA says it expects plan fiduciaries will find the DOL’s target-date fund fact sheet to be a useful tool. It is written in clear, non-technical language and includes steps that plan fiduciaries can easily understand.

There are many options for plan fiduciaries to consider when deciding whether to incorporate a TDF into an investment lineup. In its fact sheet, the DOL emphasizes that considerable differences exist among TDFs; it points out the need for plan fiduciaries to understand the principal components of the various TDF strategies, as well as the primary differences among them, and to consider these factors when determining which, if any, TDF would work best for their plan. Several of the central differences—glide path and portfolio construction, off-the-shelf versus custom, type of investment vehicle underlying the strategy, and cost—are discussed in DCIIA’s white paper.

Lew Minsky, DCIIA’s executive director, comments: “A good starting point for plan fiduciaries when reviewing TDFs is to note that, while there are many variations among these funds, generally they all seek to offer: diversification among asset classes; professional fund asset management pre- and post-retirement, and reduced exposure to equities as participants near retirement age.”

These features, as well as the fiduciary protections available when one of these funds is offered as the plan’s qualified default investment alternative (QDIA), may make a TDF a prudent choice for both a plan fiduciary and plan participant. As an alternative to a TDF, some plan sponsors may choose another type of QDIA, such as a managed account or a balanced fund.

Each plan’s unique characteristics and circumstances will help inform an appropriate selection in which a wide range of product choices is available. Investment performance, level of diversification, cost and consistency with the plan’s objectives are key factors in default investment selection. Whatever the choice, both adhering to a selection process and documenting the decision are critical.

In March 2013, the DOL offered general guidance to assist plan fiduciaries in selecting and monitoring TDFs (see “Incorporating DOL TDF Tips into Your Processes”).