Thursday, February 05, 2009

Target Date Retirement Funds - Best Practices

According to testimony before the Advisory Council on Employee Welfare and Pension Benefit Plans, evaluating Target Date Funds(TDF) is challenging, difficult, complex and one-size-does not fit -all. Best practices noted in the testimony

• the single most important decision is the design of the glide path of the TDF
• active/passive management, value customization and participant impacts are other important factors in considering the utility of TDFs
• TDF’s must be evaluated periodically (most often quarterly).
• fiduciaries should compare TDFs to their peers and relevant benchmarks,
• communications that effectively explain the TDF so participants clearly understand the underlying investments and how the glide path works is important also,
• a plan sponsor should consider what levels of defined benefit, Social Security benefit or other pension benefit that participants are likely to have,
• the design and structure should be compared to the plan’s unique demographics,
• consider individual participant risks - participants need to understand the limitations of these funds,
• customization will be big in the future,
• annuity type options or managed payout type funds are going to become more and more prevalent,
• benchmarking is a problem. Focus should be on trying to define a “process” for evaluating these things and not relying on one particular measure to monitor it,
• one firm’s TDFs would be appropriate if the plan sponsor is comfortable with the overall philosophy and that should not change based on the target date of the fund,
• looking at the underlying funds that may make a TDF could be illustrative since the underlying funds have likely been in existence long enough to build up a track record,
• liquidity of certain investments in a TDF may be a challenge,
• consider using different TDFs from different vendors,
• carefully evaluate costs,
• Plan sponsors should ask vendors for an investment policy statement,and
• sponsors should strive to maximize the number of participants who reach a minimum level of income replacement in retirement.

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