White Paper Offers Fiduciary Guidance on TDFs

Beaumont Capital Management (BCM) has released a new white paper which digs into the specific details of the Department of Labor (DOL’s) rules outlining fiduciary responsibility in regard to the management of target-date funds (TDFs).

“The target-date fund is one of the most commonly utilized offerings in 401(k) plans, and for good reason,” says Dave Haviland, BCM’s Managing Partner and Portfolio Manager, and author of the new whitepaper. “For the participant, they are a straightforward way to start investing for retirement. However, since the failures of many first-generation TDFs, including their performance in the 2008 market downturn, the DOL has a close watch on this class of funds. TDFs can no longer live in a ‘set-it-and-forget-it’ era, and the DOL has taken steps to assure that plan fiduciaries know exactly what they are providing in their TDFs and that they are serving the best interests of plan participants.”

The white paper titled “Questions a Fiduciary must be able to answer about their Target Date Funds,” also offers guidance about how TDFs should be approached to meet federal compliance requirements and ensure that plan participants’ best interests are being met, the firm says.

According to BCM, the paper provides insights on how to create an objective, documented process for comparing, selecting, and reviewing TDFs; and how to understand funds’ investment mixes as well as the risks involved. The company notes that equity ownership across TDFs can vary as much as nearly 50% in some cases. It adds that “not all bonds in TDFs are the same and many are not the more conservative position typically sought to balance portfolio risk.”

The paper also attempts to help plan fiduciary’s determine whether base expenses are appropriate for the services provided, with an emphasis on sustainability and value, and to examine whether TDFs are designed to avoid large losses and get defensive in times of market failures.

The white paper states, “Index-based TDFs offer little to no protection against large losses. Dynamic TDFs can. The key is to discuss the options with the sponsor/employees and document their (now) informed preference.”

BCM also points out that “In 2008, the three largest 2010 TDFs lost between 21% and 27%. Those major losses changed the lives and plans of those about to start their retirements in ways that no one wants to see happen again.”

Moreover, the paper explores the question of effective participant communication, which the firm says will become no longer just a goal, but a requirement starting at the beginning of the relationship with a participant.

“We strongly support the DOL’s actions and believe that all retirement plan professionals must be fully aware of their increased fiduciary responsibilities,” says Haviland. “Target-date funds will continue to be a popular option, often accounting for as much as three-fourths of the plan assets, but participants must have the confidence and assurance that they are being well guided and fully informed in their investment decision-making.”

Beaumont Capital’s white paper can be found online here.