In a relatively far-reaching report, the DOL issued a briefing that outlines steps plan sponsors should take when considering and monitoring TDFs. The most interesting one is their recommendation that sponsors should consider custom or non-proprietary TDFs given the overwhelming dominance of proprietary TDFs from the “Big 3” providers, which rely heavily, if not exclusively, on their own funds.
After reviewing the theory behind TDFs and how they could be beneficial, especially as a QDIA, and warning sponsors that they should determine whether a fund is designed to take a participant “to” or “through” retirement, the DOL recommended that plan sponsors should:
• Create and document a well-thought-out process, reviewing the performance and fees of the TDF and whether they are aligned with their participant population and taking into account their age, salaries, turnover rate, deferrals, withdrawal patters and whether a DB plan is available.
• Periodically review the process to determine if there have been any substantial changes with the fund or the company.
• Understand the underlying investments, asset allocation model and glide path.
• Review fees and expenses with special emphasis on fees charged by the TDF provider above and beyond the expense ratios of the underlying investments.
• Special emphasis on considering custom glide paths that can use the plan’s core line-up, with warnings about the pitfalls of relying on the TDF manager’s proprietary funds (which can limit diversification).
• Proper employee communication, with a suggestion that additional participant disclosure regs about TDFs will be forthcoming.
• Using third-party resources to evaluate funds.
This statement is a wonderful prospecting tool for advisors that already have a process to help their clients select and monitor TDFs -- especially those who use custom glide paths showing the increased benefits to participants.
