• Department of Labor Issues Guidance for Target Date Retirement Funds
  • March 12, 2013
  • Law Firm: Troutman Sanders LLP - Atlanta Office
  • The Department of Labor (DOL) recently issued guidance to assist employers and fiduciaries in selecting and monitoring target date retirement funds (TDFs).

    Background

    A TDF is an investment vehicle in which the asset allocation of the investment vehicle adjusts over time. Generally, the TDF allocates assets in “higher risk/higher reward” type of investments (such as equities) when the target date is a number of years away, and shifts automatically to more conservative investments (such as fixed income) as the target date approaches (the shift referred to as the “glide path”).

    TDFs may be attractive for employees who do not want to actively manage their retirement savings. TDFs have become increasingly popular since the DOL approved them as a qualified default investment alternative (QDIA). A QDIA is a default investment fund option chosen by a plan fiduciary for participants who do not make an election regarding the investment of their account balance under their employer-sponsored defined contribution plan. The QDIA rules provide certain protections to plan fiduciaries when a participant fails to provide investment directions.

    The New DOL Guidance

    The DOL guidance includes a helpful “to-do list” for employers and fiduciaries when choosing a TDF for their qualified defined contribution plan. Here are the key points:

    • Establish an objective process for comparing and selecting TDFs to ensure that the fiduciary can evaluate the prudence of any investment option offered in the Plan.

    • Establish a process for the periodic review of selected TDFs, which, at a minimum, should include examining whether there have been any significant changes in the information that the fiduciary may have reviewed when the option was first selected.

    • Understand the TDF’s investments - the allocation in different asset classes (stock, bonds, cash), individual investments, and how these things will change over time (e.g. the glide path). It is important to consider whether a glide path will use a “to retirement” approach, with investments being the most conservative at the time of retirement, or have the glide path continue “through retirement,” in which the most conservative point of the investments will not be until years later.

    • Review the fund’s fees and investment expenses (as well as possible fees and expenses if the TDF invests in underlying funds that may charge fees and expenses).

    • Inquire about whether a non-proprietary TDF (a fund that uses only the vendor’s proprietary funds as component investments) or custom-designed TDF (a fund which may include nonproprietary funds as component investments) would be a better fit for your plan.

    • Develop effective employee communications to keep participants generally informed about their investment and to comply with disclosures required by law (for example, participant-level fee disclosures required for all 401(k)-type individual account plans), as well as being sure to check the DOL’s Employee Benefits Security Administration website for disclosure requirement updates.

    • Take advantage of available sources of information to evaluate the TDFs and the recommendations you received.

    • Document the selection and review process, including how decisions about individual investment options are made.