The consensus coming from Morningstar’s annual investment conference late last month was that target date funds are doing their job—and doing it well. They’re performing to expectations and, more importantly, mitigating some of the investor’s bad behavior bemoaned by economists and advisors in recent years.
But throw in the recent Tibble v. Edison decision, and things could get a bit more complicated for the product. The landmark ruling means a duty to monitor is front-and-center and codified by law. The question on everyone’s mind, of course, is what a “duty to monitor” actually means, and how far plan sponsors and advisors will need to go in their due diligence.
Target-date funds are far from exempt. While equity and bond ratios are widely publicized, what the underlying assets consist of exactly is often far less known, and that could be a big problem. Morningstar recently looked into what, exactly, is in the allocations.
“Glide paths usually stick to equity and bond allocations, but we decided to peel it back a level further,” said Jeff Holt, target date fund analyst with Morningstar. “We looked into exactly what was in the equity and bond allocations. What was the ratio of domestic to international equities, what about corporates versus TIPS, that sort of thing?”
He emphasized that it is incredibly important for plan sponsors and retirement plan advisors to know what the specific allocations consist of.
“You can’t go completely passive in TDFs because managers still have to make active decisions about allocations, regardless,” Holt concluded. “This is especially true now that the DOL has increased scrutiny as they attract more and more assets. It’s more important for plan sponsors and retirement plan advisors to really know what’s in them.”
See Also:
- Tibble Decision Cited in Latest Fidelity 401(k) Lawsuit
- The Latest Targets of 401(k) Fee Lawsuits Are …
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
