• Plan Sponsors, Are you on Target?


    A Guide to Understanding and Monitoring your Target Date Fund Program.


    Target-date funds are becoming more popular with company 401(k) retirement plans. And as they do so, it puts more burden of responsibility on the plan sponsor to know what they are offering their employees who chose to invest in Target-date funds (TDF).

    According to the SEC’s document Recommendation of the Investor Advisory Committee Target Date Mutual Funds April 11, 2013, TDFs had approximately $485 billion at the end of 2012, up 29% over the previous year. Roughly 70 percent of U.S. employers report offering target-date funds as their default investment option for company sponsored defined contribution plans.

    What is a target-date fund? Wikipedia states…

    A target-date fund – also known as a lifecycle, dynamic-risk or age-based fund – is a collective investment scheme, usually a mutual fund, designed to provide a simple investment solution through a portfolio whose asset allocation mix becomes more conservative as the target date (usually retirement) approaches.

    How long have target-date fund been around?

    Again, Wikipedia states…

    Target-date funds were first introduced in the early 1990s with BGI being the first institution to offer such products.[1] Their popularity in the US increased significantly in recent years due in part to the auto-enrollment legislation Pension Protection Act of 2006 that created the need for safe-harbour type Qualifying Default Investment Alternatives, such as target-date funds, for 401(k) savings plans.

    Truth in Labeling; not all Target-Date Funds are created equal!

    ‘My biggest problem with target date funds is that they had absolutely no labeling requirements’ so participants would be confused as to what a 2015, 2020, or 2025 fund really meant’ says Ary Rosenbaum retirement plan attorney in his article “Off the Mark

    Rosenbaum continues ‘Before the last bear market, a participant who thought they would retire around 2010, naturally would have selected a 2010 target date fund. The assumption was that such a fund would be more heavily invested in fixed income securities with very little equity exposure. 2010 target date funds lost an average of nearly 24 percent in 2008, according to the Securities and Exchange Commission (SEC). Losses ranged from 9 percent to a whopping 41 percent. That is a 32 percent difference for participants that are supposed to be in the same boat, retiring in 2010. Imagine the participants invested in the 2010 target date fund that lost 41 percent, almost half of their retirement nest egg was wiped out with retirement just a few years away by a fund that they thought had limited equity exposure.”

    Echoing these sentiments is Rolf Wulfsberg global head of quantitative research at Siegel+Gale, a strategic branding firm, which conducted the SEC survey on target-date fund as discussed in the June 14, 2013 Wall Street Journal article ‘Missing the Target‘.

    “Two funds with the same target date don’t necessarily have the same proportion of stocks and bonds—but barely half of people who own target-date funds realize that fact”

    “There is a lot of Misunderstanding”

    Wulfsberg goes on to say, ”There is a lot of misunderstanding. In fact, similar-sounding funds can have different risk profiles. The T. Rowe Price Retirement 2030 Fund, for example, has 82% of its assets in stocks and 17% in bonds and cash, while the Fidelity Freedom 2030 Fund is 62% stocks and 38% bonds and cash, according to Morningstar.”

    What’s your Target-Date Fund’s Glide path?

    Let’s start with defining what the glide path is as it relates to target-date fund. Investortopia states it as follows:

    Definition of ‘Glide Path’

    Refers to a formula that defines the asset allocation mix of a target date fund, based on the number of years to the target date. The glide path creates an asset allocation that becomes more conservative (i.e., includes more fixed-income assets and fewer equities) the closer a fund gets to the target date.

    Joseph C. Nagengast, author of Target Date Analytics, LLC says it this way, ‘A target-date funds operating strategy is the glide path, which schedules the transition from a high-growth, high-risk portfolio early in a participant investor’s working life to a low-risk, preservation-minded portfolio as the target date arrives.’ 

    Is your Glide Path “To” or “Through”? 

    “To” glide paths will have lower equity exposure at age 65 whereas “through” glide paths will have much more equity exposure at age 65 and continue that equity exposure, in a decreasing manner, out to life expectancy. The “To” glide path fund company is working from a philosophy that the participant wants minimum equity exposure (risk) at age 65 and will likely roll his/her 401k to an IRA at retirement to begin distributions. The “through” fund company views longevity, not market risk & volatility, as the greatest risk to an age 65 retiree and hence, philosophy to keep a higher proportion of equity assets in the glide path at age 65. Which philosophy is correct, which is incorrect? Neither, they are merely different. But as a plan sponsor, do you know your glide path, and how have you communicated your target-date fund glide path to your participants? Is your glide path reflective of your company’s employee culture?












    “To” Glide path above                                                                                              “Through” Glide path above

    Fiduciary Considerations of Selecting the Right Target-Date Fund for Your Plan

    In a white paper written by Bradford P. Campbell of the well-noted ERISA law firm Drinker Biddle & Reath LLP there are several key considerations in selecting your target-date fund. Those considerations in his paper include:

    • ●A prudent, thorough well-documented target-date fund selection process.
    • ●Guidance about the definition and duties of a fiduciary.
    • ●Limitations of QDIA status with regard to target-date funds.
    • ●Knowing the difference between ‘to’ and ‘through’ target-date fund.
    • ●Educational tools that can help fiduciaries gather information necessary to inform their prudent decision-making process.

    Tips for ERISA Plan Fiduciaries, Target-Date funds.

    The U.S. Department of Labor has a guide for plan sponsors with respect to their target-date fund investments. The document dated February 2013 covers these points:

    • ●Establish a process for comparing and selecting TDFs.
    • ●Establish a process for the periodic review of selected TDFs.
    • ●Understand the fund’s investments
    • ●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 TDF and recommendations you received regarding the TDF selection.
    • ●Document the process.


    Lastly, how does your TDF fit with your Investment Policy Statement (IPS) and Education Policy Statement (EPS) and the culture of your company and its employees? Does your TDF program have asset classes to adequately hedge against inflation?

    Gratke Wealth, LLC Target Date Fund Analysis Toolbox.

    By access our toolbox, we can perform Target-Date Fund Evaluation and Recommendation – Researching, evaluating, recommending and documenting target-date options and suitability requirements for participants who do not make investment elections or re-enrolled automatically. The toolbox includes these areas of analysis.

    • ●Glide path; “To” or “Through”
    • ●Diversification; Asset Class Summary, Investment Management Firm
    • ●Structure
    • ●Expenses
    • ●Volatility Comparisons; Up/Down Capture Ratios, Drawdown
    • ●Inflation Hedge


    At Gratke Wealth, we understand that you are busy and don’t have the time to manage your company’s 401(k) plan. We help you put all the pieces at work so the company’s hard earned assets are optimally employed.

    As you know, a retirement plan sponsor must act as a prudent expert under the Employee Retirement Income Act of 1974 (ERISA), and is held to a fiduciary standard of care with respect to plan-related decisions regarding investments, service providers, plan administration, and general ERISA compliance issues.

    Gratke Wealth, in conjunction with Retirement Plan Advisory Group, Inc, helps 401(k) plan sponsors fulfill their ERISA fiduciary obligations while insuring participants are ‘retirement ready’ and that they may retire with dignity.

    We look forward to assisting you in the analysis of your target-date fund program.

    Contact us to begin the process of the Target-Date Fund analysis Review-click here.

    Schedule an appointment now-click here.

    Additional reading:

    More Perspective on the Target-Date “TO-Versus-Through” Choice, March 2012, Joseph C. Nagengast, Target Date Analytics LLC

    Missing the Target Wall Street Journal June 14, 2013, Liam Pleven Joe Light

    Fiduciary Considerations of Selecting the Right Target-Date Fund for Your Plan, March 2012, Bradford P. Campbell, Drinker Biddle & Reath LLP

    DOL Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries, February 2013, U. S. Department of Labor, Employee Benefits Security Admin.

    Click here to download the above articles (that are not hyperlinked).


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