“Raising the Bar on Target Date Due Diligence,” a collaboration between Manning & Napier, an investment management firm, and Strategic Insight, an Asset International company that provides clients with mutual fund industry research and business intelligence, found that despite the rapid adoption of target-date funds by plans and the responsibilities on monitoring such funds, many fiduciaries admitted that they were still unclear on what their target-date funds really hold. According to the paper, this uncertainty comes from a lack of complete and comparable disclosure among target-date funds.
The paper recommended that fiduciaries should question whether the underlying securities of target-date funds are appropriate to meet the retirement saving needs of plan participants. While the paper acknowledged that examining funds in such details is a challenge, regardless of this complexity, investment option due diligence in a fiduciary responsibility that must be carried out to ensure that assets are managed prudently for the benefit of the plan participants.
In terms of the transparency of target date portfolio construction, the paper examined:
- Qualified default investment alternatives (QDIAs);
- Investment selection and monitoring;
- Core fund selection screening criteria;
- Guidance on screening and monitoring from the Department of Labor; and
- Comprehensive target date screening criteria.
With regard to target date due diligence for fiduciaries, the paper looked at three key considerations, which included asking if the target-date fund was transparent or translucent (i.e., whether the underlying holdings for each target-date fund are revealed), if all levels of portfolio management coordinate, and whether the target-date fund is overdiversified.
The paper concluded that full transparency on the underlying investments in a target-date fund should allow plan sponsors and advisers to better perform their fiduciary duties of due diligence on target-date funds at a level similar to that of more traditional core funds on the investment menu.
The full white paper can be found here.