Target Date funds have become a popular investment choice in most retirement plans, but what unique fiduciary responsibilities come with the use of these funds? In this month’s newsletter, we will discuss how to compare your target date funds. Next month we will make recommendations on how to avoid potential pitfalls while allowing your employees to benefit from this hands-off approach to investing.

Every investment company has its own marketing name for the concept but all offer a group of funds having a series of dates included in the names: 2015, 2025, 2035, 2045, etc. Participants simply pick the fund that most closely approximates the year in which they reach retirement age. The fund will be managed in a way that becomes more conservative over time, with the target date being the date of expected withdrawals.

Though Target Date funds continue to attract the dollars of plan participants, they also have come under heavy criticism since the market turmoil of 2008, including comments by SEC Chairman Mary Schapiro and hearings on Capitol Hill. Plan sponsors are beginning to realize that funds having the same target date (e.g. 2015) may have greatly different risk levels and structures. When selecting or monitoring target date funds, fiduciaries should consider the following key characteristics:

• The Equity Glide Path represents the range of allocation to equities during the participant’s use of these funds. That range will have a starting allocation and an ending allocation. The balance would be invested in fixed income investments. For example, an Equity Glide Path of 90-30 would be one where the youngest of employees would have 90% of their balance in equities and as they get older, that equity weighting would gradually be reduced until it dropped to 30%. At the same time that their equity exposure declines, their allocation to fixed income investments would grow from 10% initially to 70% at retirement. While the percentages differ from one fund family to another, the basic premise of getting more conservative over time is the same.
• “To” or “Through”? The Roll Down Timeframe is the range of years during which the Equity Glide Path is reduced. Some funds may start reducing their equity exposure in the participant’s 20’s, while others in their 40’s. Perhaps the most important element during the Roll Down is where it stops. Target Date funds can be divided into two categories: those that manage “to” the retirement age of 65, and those that manage “through” retirement. While there is no right or wrong way, fiduciaries should consider participant behavior as they monitor these options. Will most of your plan participants continue to hold this investment well into retirement or will they cash out and reinvest elsewhere?
• The approximate Equity Exposure at Age 65 is also important. In discussing this topic with committees around the country, we are finding fiduciaries (as well as participants!) shocked to learn that many popular Target Date funds may have upwards of 50 to 55% equity exposure at age 65. Again it’s not necessarily a question of what is right or wrong, but rather a consideration of the Target Date’s approach, along with how your participants are using/viewing them. More often than not, we find funds that manage “to” retirement will typically have a lower exposure to equities at age 65 than those that manage “through” retirement.

Next month, Target Date Funds (Part II): Practical Strategies for Plan Sponsors

Who Is A Fiduciary?

ERISA requires fiduciaries to act solely in the interest of plan participants and their beneficiaries; to carry out their duties prudently; to follow the plan document; to diversify plan investments; and to pay only reasonable plan expenses. This is all very important, but does little good if the fiduciary doesn’t even know he or she is a fiduciary. A basic definition of a fiduciary is a person who exercises any discretionary authority or control over the management of a retirement plan or its assets.

You are a fiduciary if you:

• Have decision-making authority in the selection and retention of plan fiduciaries.
• Select plan investment vehicles.
• Give investment advice with respect to plan assets for compensation.
• Acquire or dispose of plan assets.
  
• Make discretionary decisions under the plan (e.g., authorize or disallow benefit payments).
• Select plan providers, recordkeepers, consultants, etc.

Examples of fiduciaries can include Retirement Plan Committee Members, Board of Directors, Company Officers, and HR Directors. For additional information or questions about your role as a plan fiduciary, please contact us or email mmontgomery@m-rpa.com.

Retirement Readiness by the Numbers

A recent Hewitt & Associates study, consisting of more than two million employees at 84 large U.S. companies, found the average employee will need 15.7 times their final pay in retirement resources to maintain their current standard of living. The survey reveals that Social Security is expected to provide 4.7 times final pay, on average, for employees entitled to full retirement income benefit. This leaves 11 times final pay need, from other sources, to achieve the full 15.7 multiple. The analysis goes on to conclude that 18 percent of employees who contribute to a defined contribution plan and do so over their full career are expected to achieve retirement readiness. On average, this should produce 13.3 times their final pay (including Social Security) leaving 2.4 times pay unfunded. When factoring in recent market volatility the average worker who relies solely on their defined contribution plan is projected to meet 74% of their retirement income needs. This figure increases to 91% for those who are also covered by an active or frozen defined benefit plan.

There is some good news. Workers can significantly improve their situation by making a few small adjustments:

• Start Saving Today. Approximately 26% of workers who are eligible for a defined contribution plan do not contribute.
• Regularly Increase your Contribution rate. Even as little as a 1% increase in your contribution rate per year for 5-10 years may keep you on track to meet most of your financial needs at retirement.
• Work Longer. Delaying retirement to age 67 can significantly reduce your savings shortfall.
  

Contact us or email mmontgomery@m-rpa.com to discuss creative ways to encourage positive savings habits and help employees achieve retirement readiness.

Communication Corner: It’s Never Too Late

This month’s sample participant communication memo briefly reviews why it’s never too late to start saving for retirement. Encourage participants to enroll in the plan today, especially if you have open enrollment coming up in July.
Email info@m-rpa.com for copy that you can print and distribute to employees.

This material is intended for informational purposes only and should not be construed as legal advice and is not intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent. Montgomery Retirement Plan Advisors does not warrant and is not responsible for errors or omissions in the content of this newsletter.

Securities and investment advisory services offered through Financial Telesis Inc. Member FINRA / SIPC. Montgomery Retirement Plan Advisors and Financial Telesis Inc. are not affiliated.