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Monday, September 12, 2016

Understanding Custom vs. Proprietary Target Date Funds

Target date funds (TDFs) are characterized as either proprietary or custom. The U.S. Department of Labor encourages plan fiduciaries to consider a custom solution. Custom TDFs are typically offered in separate account or collective trust vehicles. These vehicles are not registered as investment companies under the Investment Company Act of 1940 and therefore are precluded from use in 403(b) plans. Proprietary TDFs are defined as pre‐packaged investments that usually are comprised of underlying mutual funds of a single investment firm. Therefore, it can be challenging to ensure “best in class” managers are offered across the underlying funds within the proprietary TDF.


Monday, August 29, 2016

Target Date Fund Basic Definitions - Part 2

The U.S. Department of Labor's Employee Benefits Security Administration issued tips intended to help plan sponsors select and monitor target date funds (TDFs) in their investment lineups. These target date fund basic definitions will help plan fiduciaries navigate the Department of Labor Tips for ERISA Plan Fiduciaries.
  1. Asset classes are groups of securities that exhibit similar characteristics. The three main asset classes are equities (stock), fixed-income (bonds), and cash. Additional asset classes that may be employed within a target date fund are: world bond, emerging markets, and/or real assets like commodities and real estate investment trusts (REITs).

Tuesday, August 23, 2016

Guidelines for Reviewing Target Date Funds

In 2013, the U.S. Department of Labor’s Employee Benefits Security Administration issued tips intended to help plan sponsors select and monitor target date funds (TDFs) in their investment lineups. It is incumbent on plan fiduciaries to establish a process or fiduciary best practice for comparing and selecting target date strategies, especially when they serve as the plan’s Qualified Default Investment Alternative (QDIA). Fiduciaries should implement a process to perform periodic reviews to have a clear understanding of the investments and how they will change over time, and to compare the funds’ fees.

Monday, August 15, 2016

Target Date Fund Basic Definitions - Part 1

The U.S. Department of Labor's Employee Benefits Security Administration issued tips intended to help plan sponsors select and monitor target date funds (TDFs) in their investment lineups. These target date fund basic definitions will help plan fiduciaries navigate the Department of Labor Tips for ERISA Plan Fiduciaries.

  1. Target date funds automatically adjust their asset mix to become more conservative as an employee gets closer to his or her target retirement date.
  2. QDIA is a default investment option chosen by a plan fiduciary for participants who fail to make their own investment election. The Pension Protection Act of 2006 approved target date funds as a QDIA.

Wednesday, August 10, 2016

Using Target Date Funds as a QDIA

The Pension Protection Act of 2006 (PPA) encouraged employers to adopt automatic enrollment features for their participant‐directed plans by providing a new type of fiduciary liability relief for “default investments,” or Qualified Default Investment Alternatives (QDIAs).

A QDIA is used when a participant fails to make his or her own election. An investment must have specific qualifications to be considered a QDIA. Importantly, a QDIA’s asset allocation strategy need only take into account participant age, and does not need to consider an individual participant’s risk tolerance or other investment assets.