Investing October 21, 2020

Revisiting the DOL’s 2013 TDF Tips

Even as target-date funds evolve, the Department of Labor’s guidance for selecting and monitoring the funds is still relevant.

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Target-date fund (TDF) structures have become increasingly complex since their introduction in the 1990s. Some TDFs now include lifetime income options and expand equity along the glide path for different TDF families.

But even as TDFs evolve, the Department of Labor (DOL) has not updated its tips on implementing and managing TDFs, which were released in 2013. Still, expert sources say, the guidelines are relevant.

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David O’Meara, a senior investment consultant with Willis Towers Watson, says that while underlying investments might change, the processes for the initial selection and periodic reviews of TDFs continue to stand. “We generally advise our clients to revisit this at least every few years, if not every year, to review, among other things, all of the guidance that was proposed by the DOL in 2013,” O’Meara says.

While the DOL requires employers to “establish a process for the periodic review of selected TDFs,” reviewing funds doesn’t stop at benchmarking, says O’Meara. Frequently revisiting the funds ensures plan sponsors have a complete view of the investments. As another tip from the DOL says, “Understand the fund’s investments—the allocation in different asset classes (stocks, bonds, cash), individual investments, and how these will change over time.”

“Take a look at the funds on an ongoing basis—how are they built now, what changes were made, what kind of performance is expected out of our firms going forward—to really have that holistic view of how that fund family has performed in the past,” O’Meara says.

The DOL also gives guidance on fees, he adds. “We continue to see fee compression in the defined contribution [DC] market broadly, and specifically among target-date fund providers. If a plan sponsor hasn’t reviewed fees and wants to do competitive benchmarking of their TDF fees, now is the time to do it. Fees continue to come down and are very competitive, and there may be an opportunity for plan sponsors to continue to lower fees on behalf of their participants.”

More target-date portfolios are using lifetime income solutions than they did in the past. The DOL and the IRS have each issued guidance encouraging plan sponsors to adopt lifetime income solutions in their DC plans. And last December, Congress passed a safe harbor provision for employers to include more lifetime income options for workers under the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

“We are seeing a lot of activity among plan sponsors evaluating what’s available now and the market flows,” O’Meara says. “They are also reviewing their goals and what they’re trying to accomplish in the plan, so that they can go to the market and find a solution with what they’re wanting to offer to participants.”

Mike Sanders, principal at Cammack Retirement Group, notes that the DOL tips continue to be applicable for plans of all sizes, and especially for small business employers that normally use a proprietary option. Sanders says the tips are also pertinent to larger businesses, even if these organizations have enough in plan assets to include a custom TDF.  “When we meet with these plan sponsors, they’re still focused on the value and digging in to understand what investments they have,” he says.

Recently, Sanders says, more TDF managers are including an “off-the-shelf” strategy that allows for active and passive funds. “It lowers the cost, allows you to go passive and really cheap in those asset classes. Those products are a result of some of that [DOL] guidance and speak to that guidance,” he adds.

Employers have had long-standing issues with the language and guidance issued by the DOL, as the advice can be subjective. For example, among the department’s tips is a provision that requires employers to determine if a custom or nonproprietary TDF is a “better fit” for the plan type. But what does “better fit” mean for employers? “That comes down to beliefs and objectives,” O’Meara says. “It’s important for plan fiduciaries and their advisers to know what they’re trying to accomplish.”

Plan sponsors can be focused on everything from growing their plan to managing risk along the way. “There’s no perfect answer here, so fiduciaries have to make a judgement on what is appropriate for their participants,” O’Meara continues.

Sanders encourages plan sponsors to speak with their financial advisers and recordkeepers, as there might be other options besides a nonproprietary or custom TDF that are a good fit for their plan. Based on a plan review, demographics and design, employers can work with third parties to implement the right fund for participants.

“It’s not as simple as saying, ‘You should do a custom TDF,’ because there are so many different share classes that you might be able to get an all passive target-date fund for a few basis points that you couldn’t build,” he says. “It really depends on what the information tells you.”

Data and Research October 21, 2020

Older Workers Suffering Higher Unemployment Rates Since COVID-19

This threatens older workers' retirement security, says a report from The New School, in which it makes policy suggestions.

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Unemployment rates for workers 55 and older have exceeded those of mid-career workers since the coronavirus pandemic hit, according to a report from The New School’s Retirement Equity Lab.

Nearly 10% (9.7%) of older workers are unemployed, compared with 8.6% of mid-career workers, those between the ages of 35 and 54. By comparison, in 2010, following the Great Recession, 7% of older workers were unemployed, whereas 8.2% of mid-career workers were.

The New School also says older workers who are Black, female or lack a college degree have experienced higher rates of job loss. It adds that the unemployment rates older workers are experiencing, compounded by the health risks of COVID-19, threaten their retirement security.

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The New School is calling on Congress to increase and extend unemployment benefits for older workers, expand Social Security, create a federal Older Workers Bureau at the Department of Labor (DOL), lower Medicare eligibility to 50 and discourage early withdrawals from 401(k)s and individual retirement accounts (IRAs). The Older Workers Bureau would research and analyze topics of concern for older workers, create policies to prevent age discrimination in the workforce against older workers and raise awareness about the economic and societal benefits of offering quality work for older workers.

“In every recession since the 1970s, older workers had persistently lower unemployment rates than mid-career workers, partly because of the benefits of seniority,” The New School says. “In the current recession, this trend has flipped. In each month since the onset of the pandemic, older workers experienced higher unemployment rates than mid-career workers, representing a recovery gap in age.”

The New School says fewer older workers were able to find work between April and September, with only 28% of unemployed older workers finding new jobs, but 32% of mid-career workers having the same success. In the past six months, older workers were 17% more likely to fall into unemployment than mid-career workers—and this isn’t counting the fact that some older workers have left the workforce. Black older worker were 26% more likely than white older workers to lose their jobs, and older women were 38% more likely than older men to lose their jobs. Those without a college degree were 45% more likely to lose their jobs.

“Persistent unemployment will cause more older workers to leave the labor force earlier than planned—increasing downward mobility and poverty in retirement,” The New School says. “The unequal distribution of unemployment—which has fallen more heavily on women, workers of color and those without college degrees—is likely to exacerbate existing inequalities in retirement preparedness.”

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