More and more defined contribution plans offer "target date funds" as investment options. Some estimates range as high as 75% of plans make these funds available to participants. These types of funds tailor investments to a participant's projected retirement date, meaning they should move from aggressive to conservative as the participant nears retirement age. Many plans use these funds as "qualified default investment alternatives" ("QDIAs") which would be safe-harbor investments for fiduciaries to select for participants who don't make their own elections. In the past, I have suggested that fiduciaries should be aware of the fact that not all target date funds are good options and that fiduciaries should be wary of fees and expenses in these funds before choosing them as an option. Fiduciaries should also be aware that a target date fund invests in other funds, so performance can vary significantly based on the investment restrictions of the target date fund. Obviously, the best strategy for using a target date fund is to provide as much information as possible to participants so that they understand that simply because a fund says it has a target date, that does not mean that the target date satisfies the particular investment need of all participants. Ultimately, though, the problem is that if these funds are in a 401(k) plan, it is very likely that not only are the fiduciaries unsure of how they operate, but that the participants have no idea either. Whether or not this is the case, the DOL assumes it is, and after having a variety of hearings and other surveys, has issued proposed regulations requiring special participant disclosures for target date funds, even if participants are not defaulted into them, and for other "qualified default investment alternatives". Plans would have to give participants the following: An explanation of how a target date fund's asset allocation will change over time, and the point in time when it will reach its most conservative position. A graphical illustration of how a target date fund's asset allocation will change over time. For a fund that references a particular date, such as the "Retirement Fund 2030", an explanation of the relevance of the date to the asset allocation. A general warning that the target date fund may have losses and does not guarantee that sufficient assets will be available for retirement or any specific return. If the target fund is the QDIA, there has to be a detailed disclosure of the principal strategies and risks of the QDIA, more information about fees and expenses, and historical performance data. These will be consistent with the final disclosure regulations that will apply to all participant directed investments. Ultimately, the DOL is going to provide us with a checklist for fiduciaries who already have or are considering adding target date fund as an investment option. But until that checklist is issued, fiduciaries that have target date funds as an option should consider expanding their educational efforts to participants and also become more familiar themselves with how the funds operate. The more you know, the more you can disclose and more disclosure is preferred. For more information about educating plan participants and disclosure requirements, please contact your attorney at Fox Rothschild.
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