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Wednesday, March 20, 2013

Target date retirement funds generally refer to a related group of investment funds that automatically rebalance and become more conservative as a participant moves towards a designated retirement year. Many 401(k) and profit sharing plans use target date retirement funds as the qualified default investment alternative (QDIA). In that case, when a participant fails to make an affirmative election regarding how his or her qualified defined contribution plan accounts should be invested, contributions are allocated to a target date fund based on the date the participant will attain retirement age, usually designated as age 65. Use of a QDIA relieves a plan fiduciary of liability related to the return generated on the investment fund. Also, participants who do not want to actively manage their accounts are increasingly using target date retirement funds.

In February 2013, the Department of Labor (DOL) issued tips for ERISA plan fiduciaries regarding the selection and monitoring of target date retirement funds in an ERISA plan. The fact sheet can be found on the DOL’s website. The list of tips includes the following:

  • Establish a process for comparing and selecting the target date retirement funds
  • Establish a process for the periodic review of selected funds
  • Understand the fund’s investments – the allocation in different asset classes, individual investments, and how these will change over time
  • Review the fund’s fees and investment expenses
  • Inquire about whether a custom or non-proprietary target date fund would be a better fit for your plan
  • Develop effective employee communications
  • Take advantage of available sources of information to evaluate the fund and recommendations you received regarding the fund selection
  • Document the process

The DOL fact sheet explains each of these tips in greater detail and provides a roadmap for complying with ERISA’s fiduciary duty requirement for selecting and monitoring these types of funds. You can use these tips to ensure compliance by your ERISA plan fiduciaries.

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