Many plan sponsors have selected so-called “target date” funds as the default investment under the plan sponsor’s 401(k) or other qualified plan. A target date fund is one that includes investments in different asset classes (e.g., stocks, bonds, money market) where the balance among the asset classes becomes more conservative as the participant gets older. A 2030 target date fund would be designed for use by a participant planning to retire in or near to 2030.
Plan sponsors should monitor the performance of target date funds as they would any other investment option under the plan. However, target date funds raise unique challenges, including the lack of an established index against which to measure performance and differences among target date funds in their “glide paths,” the period of time over which the fund moves to its most conservative investment allocation. Some target date funds continue substantial equity exposure after the target retirement date; others have moved to their most conservative asset allocation by the target retirement date. This difference in glide paths is sometimes called managing “to” or “through” the target retirement date.
The Department of Labor has posted on its website a short tip sheet describing target date funds and providing fiduciaries with guidance on how to select and monitor such funds. Plan sponsors offering such funds may wish to review that guidance.
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