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Target Date Funds: Are You Asking the Right Questions?

Eight years ago, the U.S. Department of Labor (“DOL”) issued “tips” for retirement plan fiduciaries to consider when selecting and monitoring target date retirement funds (“TDFs”). At the time, the DOL noted that TDFs were becoming “increasingly popular.”

Who could have predicted how popular? Earlier this year, Barron’s magazine reported that TDFs held $158 billion at the end of 2008 and $1.9 trillion as of March 31, 2020, with nearly half of all current plan contributions being invested in TDFs. (Barron’s, 7/2/2020). For many defined contribution retirement plans, the majority of assets are now held in the TDF option.

In light of the importance that TDFs have assumed within the investment menus of defined contribution retirement plans, the growth of fiduciary litigation, and the ever-increasing attention paid by the DOL, we recommend that ERISA fiduciaries reacquaint themselves with the DOL guidance on TDFs (

The following summarizes nine tips in the guidance. These tips provide a framework for fiduciaries selecting and monitoring TDFs, as well as principles applicable to selecting and monitoring investment offerings generally.

1. Understand the basics of TDFs

The DOL describes the basics as follows:

TDFs offer a long-term investment strategy based on holding a mix of stocks, bonds and other investments . . . that automatically changes over time as the participant ages. . . . As the target retirement date approaches . . . the fund’s asset allocation shifts to include a higher proportion of more conservative investments, like bonds and cash instruments, which generally are less volatile and carry less investment risk than stocks. The shift in the asset allocation over time is called the TDF’s ‘glide path.’

There are considerable differences among TDFs, and the DOL states it is “important” for fiduciaries to understand:

  • how the glide path works and whether it is “to retirement” or “through retirement;”
  • investment strategies used by the TDF; and
  • investment-related fees.

2. Establish a process for comparing and selecting TDFs

Plan fiduciaries should engage in an objective process to obtain information that will enable them to evaluate the prudence of investment options made available under the plan generally. In selecting a TDF, the DOL recommends that fiduciaries:

  • consider prospectus information, such as information about performance (investment returns) and investment fees and expenses;
  • consider how well the TDF’s characteristics align with eligible employees’ ages and likely retirement dates; and
  • discuss with prospective TDF providers the possible significance of other characteristics of the participant population, such as participation in a traditional defined benefit pension plan offered by the employer, salary levels, turnover rates, contribution rates and withdrawal patterns.

3. Establish a process for the periodic review of selected TDFs

Fiduciaries should establish a process for periodic review of the investment offerings, and the DOL guidance suggests fiduciaries ask the following questions:

  • Have there been any significant changes in the information the fiduciaries considered since the option was selected or last reviewed?
  • Has the TDF’s investment strategy or management team changed significantly?
  • Is the TDF manager effectively carrying out the fund’s stated investment strategy?

4. Understand the fund’s investments – the allocation to different asset classes (e.g., stocks, bonds, cash), individual investments, and how these will change over time

The tips include the following recommendations:

  • review the fund’s prospectus or offering materials;
  • understand the principal strategies and risks of the fund, or of any underlying asset classes or investments that may be held by the fund;
  • be sure to understand the TDF’s glide path, particularly whether the glide path is “to” or “through” retirement; and
  • be sure participants understand the TDF’s glide path assumptions when they invest, so they are not surprised later.

5. Review the fund’s fees and investment expenses

It is important to ask about and thoroughly understand the fees and other expenses associated with TDFs (and any other fund in the plan’s line-up).

6. Inquire about whether a custom or non-proprietary TDF would be a better fit for the plan

The DOL acknowledges that TDF vendors may offer a pre-packaged product which uses only the vendor’s proprietary funds as the TDF component investments; however, the DOL believes “custom” or non-proprietary TDFs may offer advantages (e.g., providing the ability to incorporate the plan’s existing core funds in the TDF, or including component funds that are managed by fund managers other than the TDF vendor itself). The DOL notes there are costs involved in creating custom or non-proprietary TDFs and they may not be right for every plan; however, “fiduciaries should ask their investment provider whether it offers them.”

7. Develop effective employee communications

The DOL notes that while it is important for plan fiduciaries to understand TDF basics, participants need to understand the investment as well. In particular, participants need to understand that an investment in a TDF is not guaranteed and that participants can lose money in the fund, including at and after the target date (which, of course, is affected by the particular glide path).

8. Take advantage of available sources of information to evaluate the TDF

The DOL recommends taking advantage of commercially available sources to assist plan fiduciaries in their decision-making and review process.

9. Document the process

As with all investment offerings, plan fiduciaries should document the selection and review process, including how they reached decisions about individual investment options.

Conclusion: TDFs have only grown in importance since the DOL issued its tips eight years ago, and the tips continue to provide a good framework for implementing a prudent process for selecting and monitoring TDFs. The tips not only outline a process, but they also provide TDF-specific questions for fiduciaries to consider. With the benefit of hindsight, we find the tips continue to provide sage advice for fiduciaries with respect to TDFs.

If you have questions regarding TDFs, please contact a member of Verrill’s Employee Benefits & Executive Compensation Group.

Topics: Fiduciary Duties