Along with the entire Rebalance Better K team, I have long been wary of a “set it and forget it” strategy when it comes to 401(k) management.
The reason for this is simple: life changes, the world changes, and your retirement strategy needs to change along with it.
Just because a certain fund or allocation seems the right solution for your personal financial and retirement plan today doesn’t mean that it will be the right solution for you tomorrow. There are many factors that can change: performance, strategies, managers, fees, and your own retirement plan and personal financial situation.
The end result of “setting it and forgetting it” when it comes to your 401(k) plan — you and your employees could miss out on significant returns.
That’s why I took note of a recent Plansponsor article reporting that members of the U.S. Senate and House also have concerns about “set it and forget it” target date funds (TDFs).
The chair of the Senate Health, Education, Labor and Pensions Committee and the chair of the House Education and Labor Committee both have requested a review of target-date funds from the Government Accountability Office.
Their concern with TDFs is similar to the concern that we at Rebalance have expressed for years: Instead of making their lives easier, these funds might actually be putting participants at risk.
I recommend that you read the entire Plansponsor article and then check your own 401(k) allocations to ensure that your retirement plan — and those of your employees — hasn’t suffered as a result of a misguided “set it and forget it” investment strategy.
Senate and House Committees Ask GAO to Review TDFs
They say that even as target-date funds have grown more popular, their expenses and risk allocations vary considerably.
By Lee Barney
Senator Patty Murray, D-Washington, chairwoman of the Senate Health, Education, Labor and Pensions (HELP) Committee, and House Representative Bobby Scott, D-Virginia, chairman of the House Education and Labor Committee, have sent a letter to the Government Accountability Office (GAO), requesting it conduct a review of target-date funds (TDFs).
They say that while TDFs are billed as offering participants retirement security by placing their assets in an age-appropriate glide path that grows more conservative as they approach retirement, the funds might actually be placing some participants at risk. Specifically, they say expenses and risk allocations vary considerably among funds.
“The millions of families who trust their financial futures to target-date funds need to know these programs are working as advertised and providing the retirement security promised,” Murray and Scott wrote in their letter. They noted that TDFs are often used as the qualified default investment alternative (QDIA) in a plan with automatic enrollment, and, as such, their assets have swelled to more than $1.5 trillion.
Their letter continued: “Retirement experts have raised concerns that the performance of TDFs and level of risk exposure can vary widely—even for those close to retirement.” They also say some TDFs may invest in alternative asset classes, including private equity, but little is known about these approaches.
Murray and Scott asked the GAO to look into 10 aspects of TDFs. First, they ask, what percentage of total defined contribution (DC) plan assets are invested in TDFs, as well as what percentage of participants are offered and participate in TDFs?
Second, for participants invested in TDFs who are approaching retirement, to what extent have they been affected by market fluctuations as a result of the COVID-19 pandemic—and how much variation is there in the performance of TDFs of the same vintage?
Third, do investors defaulted into TDFs reassess their investments, and, if so, how often?
Fourth, how does the asset allocation and fee structure vary across TDFs used as QDIAs? Along this line, they also ask, how do TDF fee structures compare with other investment products?
Fifth, how are TDFs marketed and advertised?
Sixth, what percentage of plan sponsors select off-the-shelf TDFs and what percentage turn to custom TDFs? Does one or the other deliver different performance?
Seventh, what kinds of alternative investments do TDFs invest in?
Eighth, has the Department of Labor (DOL) taken steps to help sponsors select appropriate TDFs for their plan and to help educate participants about these funds?
Ninth, when a plan does not have auto-enrollment but has a TDF in its investment lineup, what percentage of participants select the TDF?
Lastly, are there legislative or regulatory measures that could protect plan participants?