Changes Coming to Target Date Funds

admin | September 16, 2010 | 0 Comments

                             The Right Way

The growth of Target Date Funds, along with concerns about changes, attracted more than 165 advisors to ASPPA’s second Advisor Webcast Series presentation on September 15. ASPPA members Michael Malone (MJM401k) and Fred Reish (Reish & Reicher) delivered a riveting discussion about TDFs to help advisors gain a competitive advantage over their peers.

Malone began by offering an historical recap of the fund series, including its unrivaled growth in the defined contribution space. He attributes a potential cause for the rapid growth to the auto feature—that even the worst target date fund is likely better for average participants than what they could do on their own.

Reish concurred by saying, “Many plan sponsors have elected to re-enroll their plan participants in this investment option due to the added value it provides.” However, he cautioned that “if re-enrollment is elected, make sure the plan document or administration committee has a resolution permitting re-enrollment.”

Since 2008’s epic market decline, the federal government has taken notice of the popular target date or life-cycle fund market. Senator Kohl, chairman of the Senate Special Committee on Aging, along with the U.S. Department of Labor (DOL) and the SEC, have taken a heightened interest in TDFs due to the wide, unexpected range of returns—for example, in 2008, the best 2010 TDF returned a loss of <4.67%> with the worst 2010 TDF returning an unexpected loss of <41.84%>.

According to Reish, “DOL is involved because nearly 60-65% of Target Date Fund assets being invested are in qualified plans.”

To solve these issues, both the DOL and SEC have taken action with four regulatory related items: (1) a DOL issued checklist pending release; (2) a proposed DOL QDIA amendment likely to be issued this fall; (3) a joint issued DOL - SEC Investor Bulletin; and, (4) SEC marketing material guidance. Reish said these actions were required because of experience with TDFs selected pre-2008.

He suggested plan sponsors distribute the DOL – SEC Investor Bulletin to all participants to use as an educational piece.

Malone and Reish also offered a number of “must institute” best practices and how to apply them. Doing so, he said, will ensure that proper due diligence on TDFs is performed by both the advisor and the investment committee. Malone added, “The first item for committees to consider is their risk philosophy for the plan’s participants.”

A final word: In order to deliver the kind of service that plan sponsors expect, it is becoming increasingly important that advisors take action and carefully review the Target Date Funds in their plans.

For more information on these and other best practices, click here to be notified when the webcast recording (replay) is available.
Michael A. Chisnell, Jr., CFP®, QPFC, AIF®


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