The DOL regulates Employee Retirement Income Security Act (ERISA) plans including corporate 401(k)s, multiemployer profit-sharing plans and ERISA-governed 403(b)s. DOL guidance is also considered to be a best practice approach for non-ERISA retirement plans, such as non-ERISA 403(b), 401(a) and 457(b) plans.
Review of your TDFs is critical because they compose a large and growing portion of plan assets. DOL-regulated plan sponsors are required to periodically review their TDFs. Good recent performance should not obviate the need for a review. As with other options in the program, the DOL states that review should, at a minimum, assess whether there have been significant changes to the people or process related to your TDFs (see “EBSA Offers Tips for Selecting TDFs”).
The DOL further states that replacement of TDFs may be merited in any of the following three cases:
- The review identifies concerns related to the TDF’s people or process (ex. departure of key personnel);
- The TDF manager is not effectively carrying out the fund’s stated investment strategy (typically expressed through performance concerns); and
- The plan sponsor’s objectives in offering TDFs change (ex. a determination is made that a different glide path is more suitable).
Taking the DOL guidance a step further, review and possible replacement of your TDFs may be merited if options are available that are superior to what was available when the TDF program was started. Today’s universe of TDF solutions includes many more choices than those available a few years ago. Some of the newer solutions may be more suitable for your participant population. Additionally, they may be more cost-effective than what you have in place today.
Selecting or creating the right series of TDFs for your plan requires a thorough analysis. The choice is no longer just limited to “to” versus “through.” There is a wide variety of glide paths, and many self-described “to” funds are really “through” funds, and vice-versa. Asset classes and their respective weightings vary. The mix of active and/or passive management varies, and index funds are gaining as a component of TDFs.
The number of choices in TDF structures has grown significantly over the past few years. Most plan sponsors are utilizing pre-packaged proprietary funds. In many cases, that was their only choice when they initiated their TDF programs, but other choices may merit consideration now. Pre-packaged (closed architecture) solutions are available with either proprietary or non-proprietary (sub-advised) component funds. Additionally, open architecture, non-proprietary custom solutions are available.
One of the key elements of the DOL guidance focused on potential conflicts of interest. Specifically, the DOL raised concern over the use of proprietary pre-packaged TDFs when the TDF provider is the same as the provider of all of the underlying funds. The majority of TDF assets are currently invested in proprietary pre-packaged funds with “The Big Three”—Fidelity, T. Rowe Price and Vanguard.
In cases where the plan sponsor currently utilizes proprietary pre-packaged TDFs, the DOL recommends review to compare the suitability of these funds to custom or non-proprietary funds. Custom TDFs not only enhance potential suitability for the participant population, they also reduce the potential for conflicts of interest by avoiding the use of proprietary funds. The review of your TDF structure should include an analysis of the logistics and costs related a potential change. The outcome of the review could result in a decision to change solutions or it could confirm the existing arrangement.
A recommendation to replace the current proprietary pre-packaged funds is possible in cases where the same provider fills all of the following roles: (1) vendor, (2) TDF provider, and (3) manager of the underlying funds. This is depicted as the potential red flag in the chart below.
In cases where the TDF provider is not also the plan’s vendor, there is also a potential conflict. In such cases, the use of a proprietary pre-packaged solution may be merited—particularly for small-to-mid sized plans. However, it is possible that the current TDF series may not be the most suitable and/or cost effective solution.
Now is the time to reassess the suitability of your TDF solution. The review should include an analysis of the characteristics of your participant population in order to identify the optimal glide path. This could result in confirmation of your current TDFs or a recommendation for replacement.
Finally, we offer a simple check list. If you answer “No” to any of the following questions, it may be time to review your current TDFs:
- Did you add TDFs to your plan less than three years ago?
- Did you conduct a formal search for your TDFs?
- Did you have more than one choice when you selected your TDFs?
- Do you have non-proprietary TDFs?
- Is the vendor for your program a different party than the provider of your TDFs?
- Have you reviewed your TDF solution in the past three years?
Carol Boykin, CFA, President, Bolton Partners Investment Consulting Group, Inc.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.