by Ron Surz
As reported in our recent InfoGraphic, target date funds are the most popular 401(k) investment, currently at $1 trillion and forecast to quadruple to $4 trillion by the end of this decade. Despite their growing popularity and importance, there’s a lot of confusion surrounding target date funds. Some of this confusion leads to bad decisions that can harm beneficiaries, so they expose fiduciaries to potential legal action. When beneficiaries are harmed by well-intentioned but misinformed fiduciaries, restitution is warranted because fiduciaries should know better.
Einstein said “everything should be as simple as possible, and no simpler.” The benefits of target date funds are diversification and risk control, preferably at a reasonable price, so trustees should base their TDF selection on the following:
1. Who has the broadest diversification at the long dates when risk is being taken for younger participants? Broad diversification includes global stocks, global bonds, global real estate, commodities, natural resources, etc. The equity allocations of most TDFs are similar at long dates. The differentiator is diversification.
2. Who defends best at the target date? Who has the least amount of risk? There is a wide dispersion of equity allocations across TDFs at the target date. The differentiator is safety, i.e. lowest risk.
3. Are the fees reasonable, with all-inclusive costs below 50 basis points?
Don’t make the mistake of selecting on the basis of just one or two criteria. For example, one of the largest providers has the lowest fees but it is not the most diversified nor is it the most conservative. There are some excellent funds that meet all 3 criteria. Please see Fiduciary Scores that identify these excellent funds, emphasizing Prudence over Performance.
The Fiduciary Handbook for Understanding and Selecting Target Date Funds describes these decisions and introduces the Safe Landing Glide Path®, a patented process for delivering these 3 most important characteristics to fiduciaries. The SMART Fund® Target Date Fund Index tracks the Safe Landing Glide Path and is the only investable target date fund index. The book is a resource for members of the International Foundation of Employee Benefit Plans, sponsor of the Certified Employee Benefit Specialist (CEBS).
To learn more about Ron Surz, visit Target Date Solutions.
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