More and more 401(k) plans are offering target date funds, which may provide plan sponsors and participants with an effective investment alternative. Although they’re inherently complex, target date options are growing in popularity, primarily because they qualify as a Qualified Default Investment Alternative (QDIA) according to regulations issued by the Department of Labor. While target date funds qualify as QDIAs, plan fiduciaries are still faced with the responsibility of the selection and monitoring process so it’s critical to understand the differences among the choices. Here are just five of the many considerations:

1. Glide Path – The asset allocation of these options shifts over time and becomes more conservative as it gets closer to the target date. Each target date option has a unique glide path, so it’s important to understand how the asset allocation changes throughout its life and what asset classes are used in the glide path.

    

2. Active vs. Passive Management – Fees can play a large role in selecting target date options. Index-based options can provide a broad-based portfolio at a low cost compared to actively managed funds. There are target date options that include both styles.

    

3. Proprietary Funds vs. Open Architecture – Many target date options consist of only proprietary offerings. This can allow underperforming or newer funds without any history to be included in the portfolio. Overlap of underlying securities in proprietary funds can also be a problem. Open architecture options are designed to have the “best in class” managers with the ability to replace under-performing investments without conflicts of interest.

    

4. Participant Behavior – One of the more important considerations in selecting an appropriate target date series is the demographics of the participants. Plan fiduciaries should consider the average age, income, time on the job, and income replacement vehicles such as pension plans and social security during the selection process. The introduction of target date funds can effect changes in participant accounts by offering one investment option that’s broadly diversified and automatically gets more conservative as the participant nears retirement.

    

5. QDIA Option – If a target date fund is the QDIA for the plan, the plan fiduciary still has to monitor the default option and perform ongoing due diligence as they would with any other investment option in the plan. Keep in mind that comparing target date funds can be complex. Characteristics such as asset classes included in the portfolio, fee structures, glide paths, and the use of open architecture or proprietary platforms aren’t always easily compared.

Selecting and monitoring target date options for your 401(k) plan requires diligence. Following a prudent review process will help you make the best decision and meet your fiduciary responsibilities. If you’d like assistance selecting or reviewing target date funds for your 401(k) plan, please contact us.