When Did You Last Scrutinize Your Target Date Funds?
At the recent OppenheimerFunds’ Retirement Summit hosted in New York City, we polled our conference attendees to see if they actively monitored the underlying investment options in their target date funds (TDFs). While the majority said “yes,” and many do so on a quarterly basis, a substantial amount—slightly more than 30%—said “no.” So, if you are one of those advisors who have not looked under the hood of your plan’s target date funds, you’re not alone—but you may not be in good company.

It is no surprise that the popularity of TDFs has drawn the scrutiny of the U.S. Department of Labor (DOL), since many plans use them as their qualified default investment alternative (QDIA), and roughly half of all retirement contributions flow into TDFs. The DOL went so far as to issue guidance on TDFs, stating that fiduciaries need to understand the investments, glide paths and fees associated with their target date funds and suggested that plan sponsors consider whether a custom TDF might be more suitable for their plan and participants.

It’s worth pointing out that understanding the investments in TDFs means that fiduciaries need to examine them more closely. In fact, it is their fiduciary duty to do so. So what happens then when the fiduciary does due diligence on the TDF and discovers that one of the underlying funds is underperforming, or had a manager change, or is drifting from its stated investment strategy? In an off-the-shelf TDF, there is no other recourse but to remove the entire TDF and replace it with another. With a custom or semi-custom model TDF, there is no need to replace the entire TDF. Fiduciaries can replace the underperforming fund while leaving the rest of the underlying investments intact. This flexibility is one reason why we like custom and semi-custom models.

With the advancement of recordkeeping technologies, implementing custom and semi-custom TDFs is not as hard as it may appear.  In fact, by using the plan’s core investment lineup to create the custom or semi-custom model, the advisor and plan sponsor can reduce the number of funds that need to be reviewed each year.  And you are always assured that the underlying funds in the semi-custom or custom TDF are appropriately monitored.

Learn more about custom models and TDF reviews.

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