OUR THOUGHTS ON:

New Trend in 401(k) Plans May Be Headache for Fiduciaries

401(k) Plans|ERISA

By Todd Lucas

Target Date Funds (TDF) are one of the newest trends in 401(k) plans.  TDFs, including target maturity funds and lifecycle funds, help participants invest more effectively.  Additionally, many plan sponsors are re-enrolling participants in TDFs each year, to reduce the plan sponsors’ fiduciary risk.

While TDFs are established to help participant investment more effectively and protect fiduciaries, these funds might have just the opposite effect on fiduciaries.  As TDFs are commingled classes of assets, and judging and evaluating performance of these funds and the fees associated with them is often difficult.  Additionally, due the asset mix of these funds, fund-to-fund comparison can often be problematic.

The issues of performance fees and benchmarking can, individually, be rather complex.  However, combine these factors and the problems can be magnified.  Add into this mix the fact that since TDFs are often a plan’s default investment, the money in these funds can be very significant.

Recent court cases (specifically Tussey v ABB, which involved TDFs) have focused on fund selection and monitoring and benchmarking performance.  Accordingly, it is becoming more imperative that fiduciaries have a process for selecting an appropriate fund in addition to monitoring the ongoing performance (including the use of benchmarks) of the funds.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

 

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2018 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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