DOL’s TDF Guidance ‘Mischaracterizes the Market’

The DOL’s Employee Benefits Security Administration (EBSA) recently issued general guidance to assist plan fiduciaries in selecting and monitoring TDFs (see “EBSA Offers Tips For Selecting TDFs”). In it, the DOL suggests plan fiduciaries inquire about whether a custom or non-proprietary TDF would be a better fit for their plan than a pre-packaged TDF product.

Jennifer Eller, principal at Groom Law Group, told PLANSPONSOR she was “surprised and a little disturbed” by the DOL’s guidance around TDFs. Although she said overall the DOL offered useful tips in its guidance, the TDF guidance mischaracterizes the market.

For one, she said the vast majority of plans use at least some proprietary funds as their underlying investments. “So I think it puts plan fiduciaries … in a position of having to look for what may not be a product widely offered in the marketplace.”

She also thinks the DOL is understating the costs and tasks associated with adopting these TDFs. “There are some costs and administrative tasks involved in creating a custom or non-proprietary TDF, and they may not be right for every plan,” the DOL says in its guidance, “but you should ask your investment provider whether it offers them.”

This portion of the DOL’s guidance puts plan sponsors and providers “on the defensive” about their use of prepackaged TDF products, Eller said. “We want guidance from the Department, but we want it to be grounded in the reality of the market,” she added.

Jim Sampson, managing principal at Cornerstone Retirement Advisors LLC, said he thinks the DOL’s guidance about TDFs is fairly harmless; however, he said it is unrealistic to expect custom TDF options to be available with many providers, regardless of market size. “Most companies don’t have the capability to recordkeep a true custom model, and don’t want to give up the revenue they receive by using their own funds,” he said.

Sampson said the small-plan market (generally, plans with less than $10 million in assets) has limited options for TDFs. “In the small market, they’re either only offering the house brand [TDF], or the house brand and another option that’s less appealing,” he said. “This is one of the challenges I run into on a daily basis.”

The DOL’s guidance also says non-proprietary TDFs could offer advantages by diversifying participants’ exposure to one investment provider. Sampson said the small market does have an advantage in that regard—house brands in the small market are sub-advised using outsides managers.

At the end of the day, the plan fiduciary must have a prudent process that takes into account the relevant factors when deciding whether to offer a TDF and when selecting a particular fund, said Bradford Campbell, counsel at Drinker Biddle & Reath LLP’s Employee Benefits & Executive Compensation Practice Group, and the former assistant secretary of labor for EBSA. “DOL’s single paragraph of guidance on proprietary or custom funds says little more than that these are different product variations, and as such, are additional factors to consider in a prudent process.”

Campbell said in his view, they are no more or less important than any of the other relevant factors considered in making a fiduciary decision, such as cost or glide path. “There is nothing inherently superior about one class of products over another—the issue is how a particular product suits the needs of a particular plan,” he stated.