Word to the wise plan sponsor when it comes to target-date funds: No, not any fund will do, and bigger companies aren't always better.
That's why it's important to sufficiently screen funds according to predetermined, objective standards before selecting qualified default investment alternative (QDIA) for participants.
So warns an advisory from the Department of Labor, which stressed the fact that the perception of "safe harbors" can often be wrong.
Many plan sponsors will opt to use target-date funds as their plan's QDIA. But sponsors need to stay aware of how investment strategies, glide paths and fund fees significantly affect the way different target-date funds perform, the DoL warns.
The DoL's multi-step approach to fund selection stresses that sponsors must determine an investment policy statement, then "engage in an objective process" which should include considerations of prospectus information and how well the fund's characteristics align with employees' ages and likely retirement dates to evaluate investment options. Sponsors should also "document the process," noting how they reached decisions about individual investment options.
Sponsors should also consider whether a custom or non-proprietary target-date fund would be a better fit for their plans than products pre-packaged with proprietary funds. Custom target-date funds "may offer advantages to your plan participants by giving you the ability to incorporate the plans existing core funds in the target-date fund," while nonproprietary funds offer diversification opportunities through the use of outside fund managers.
Sponsors should keep in mind that "target-date funds are employer-directed rather than participant-directed," the DoL stressed. Since QDIA's are selected by fiduciaries, or the plan sponsor, having an overall investment policy statement which supplies choices for participants by itself does not guarantee the best fund fit for participants, it concluded.
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