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Does Use of Proprietary TDFs Require More Due Diligence?

At a recent luncheon with elite plan advisors, the issue of using a record keeper’s proprietary target-date funds came up.

One advisor stated that he hated it when the record keeper offered to lower plan expenses if their proprietary TDF is used as the QDIA. It also didn’t sit well with the TDF manager in the room who did not offer record keeping services.

But is there anything wrong using a record keepers’ proprietary TDF, especially if the provider promises to lower the cost of administering the plan? Many pure DCIOs with TDFs would have you believe that there is something awry with doing so, citing the DOL’s 2013 guidance on selecting TDFs, but the truth is that with proper due diligence, advisors and their clients need not be concerned.

The fact is that more plans, especially larger plans, are moving away from using their record keepers’ proprietary TDFs, with lower fees through custom TDFs fueling this migration. Some proponents of multi-manager TDFs would have us believe that offering TDFs managed by one firm does not make sense, though the results and market share of single-family TDFs show a different story so far.

It especially important to separate the due diligence of the record keeper from the plan investments, especially when a record keeper’s TDFs are used as the QDIA. It’s not uncommon to select just from the investments offered by a record keeper, but when it comes to TDFs and QDIA investments, the issues are different. And if the record keeper’s TDFs is found to pass documented due diligence screens meeting the criteria of the plan’s IPS, is there anything wrong with participants paying lower fees?

Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.

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