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An Active Year for Target Date Funds

It’s been a busy time for target date funds, according to a new report.

About 1 in 10 plan sponsors replaced their target date fund/balanced fund manager in 2014, while the proportion of plans that offer their record keeper’s proprietary TDF declined “precipitously,” from 47.5% in 2013 to 28.7% last year, according to Callan’s 2015 Defined Contribution Trends report. And, among the 144 plan sponsor respondents, this is expected to fall even further this year, to 23.6%.

Meanwhile, plans with custom target date funds continued to gain ground, from 11.5% in 2013 to 22.3% in 2014.

Fees now outrank performance as a criterion for selecting or retaining a TDF (now the second-most important criteria, fees had ranked third between 2009 and 2013).

Fees in Focus

The most important step that plan sponsors took within the past 12 months to improve the fiduciary positioning of their DC plan was to review plan fees, though fewer plan sponsors calculated or benchmarked plan fees in 2014 than in 2013, and fewer reduced plan fees after conducting a fee evaluation. More than half of plan sponsors are somewhat or very likely to conduct a fee study in 2015; furthermore, nearly half (46.7%) of plan sponsors say they are somewhat or very likely to switch certain funds to lower-fee share classes. More than 4 in 10 (44.3%) intend to renegotiate record keeper fees in the coming year.

Automatic enrollment usage increased for the fourth year in a row to reach 61.7% of plans, though only one-third of plans offer both automatic enrollment and automatic contribution escalation.

Most DC plan sponsors do not offer a retirement income solution and are unlikely to do so in 2015. When they do offer one, it tends to be via access to their defined benefit plan. In 2015, participant communication, fund/manager due diligence, compliance and plan fees are high priorities.

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