Key takeaways
- Regular reviews of target-date funds are crucial for plan sponsors and advisors
- The Department of Labor (DOL) offers a step-by-step guide for financial advisors planning to conduct reviews
- A proven process may be invaluable to advisors and employers
Ah, it is the season of the summer road trip! For the recent Fourth of July holiday weekend, AAA predicted over 70 million Americans would make a road trip of 50 miles or more. Interestingly, this represents a 62% increase from projected travel on Memorial Day weekend this year. These statistics demonstrate summer travel season is in full swing.
After the Fourth of July, another thing that will be in full swing is the second-quarter (Q2) retirement plan review season. As advisors prepare to focus on plan reviews, they may want to consider the US Department of Labor (DOL) publication, “Target Date Funds – Tips for ERISA Plan Fiduciaries.” Just as many road trips are planned with stops at interesting sites along the way, financial advisors may want to think about the DOL’s eight target-date tips as a timely resource for conducting plan reviews. A solid plan, frequent check-ins, and a broad understanding of big picture goals can contribute to both a successful road trip and plan review.
Consider the DOL’s eight tips as a guide for the next period of plan reviews.
1. Choose the best route
Establish a process for comparing and selecting target-date funds (TDFs). Just as you would use maps and travel guides to learn from others who have made a road trip like yours, financial advisors can use detailed fund comparisons and performance data to select what they believe are the most suitable target-date funds for the current plan. This ensures the selected funds align with the retirement goals of the participants.
2. Check your GPS often
Conduct a periodic review of selected target-date funds. On a long journey, you periodically check your GPS for real-time updates and to address unexpected road conditions that may warrant an adjustment to your original route. Similarly, financial advisors should regularly review target-date funds to ensure they continue to meet the plan’s objectives and adjust as necessary based on changes in market conditions or participant demographics.
3. Know the key landmarks of your trip
Understand the funds’ investments. Understanding the key landmarks helps travelers understand what to expect along their journey. Financial advisors need to understand the underlying investment strategies and the glide path of the target-date funds to anticipate how the funds will perform in various environments and explain these impacts to participants.
4. Budget for fuel and tolls
Review fees and investment expenses. Keeping an eye on travel expenses helps you adjust for unexpected events. Similarly, advisors should regularly review the fees and expenses associated with target-date funds to ensure they are reasonable and do not erode participants’ retirement savings. It is important to note that guidance does not require use of TDFs with the lowest expenses but does expect use of TDFs with reasonable expenses.
5. Explore alternative routes
Inquire about custom or non-proprietary target-date funds. Sometimes, taking a less-traveled path can offer a more interesting journey. Financial advisors should consider exploring custom or non-proprietary TDFs that might better suit the retirement planning success of a plan’s participants. Since the DOL Tips were issued in 2013, advisors now have a new breed of TDFs—personalized—to consider. There will likely be continued innovation.
6. Share your travel plan
Develop effective employee communications. Just as you would develop and share your travel plan with your passengers to keep everyone engaged, advisors should communicate clearly with plan participants about how target-date funds work, their benefits, and how they fit into the participants’ overall retirement planning strategy. At minimum, a thorough annual TDF review may be a best practice.
7. Use travel guides and apps
Take advantage of available sources of information. Leveraging travel guides and apps helps travelers make informed decisions. Financial advisors should also aim to use all available resources, such as performance data and regulatory updates, to stay informed and make data-driven decisions about TDFs. Much like some drivers prefer one driving app over another, advisors may prefer one target-date fund analytical tool over another. The key is having a well-defined process to perform analysis.
8. Keep a travel journal
Document the process. Keeping a travel journal provides a record of your journey. Thankfully, modern smartphones help create fun photo albums based on location. Similarly, documenting the selection and review process of TDFs ensures compliance and accountability, providing a clear audit trail for fiduciary decisions. The key to this step is emphasizing the importance of having an agreed- upon selection process.
By following these tips, financial advisors can hopefully navigate the complexities of target-date fund selection with some confidence, increasing the probability of a smooth journey toward their clients’ preferred retirement planning outcomes. Following the above step-by-step process may help meet fiduciary responsibilities and enhance trust and confidence among plan participants.
Based on this article here are next steps for advisors to consider:
- Review your existing plans to determine the last time you conducted a TDF review.
- Schedule reviews with each plan that has not had a TDF review in the last 12 months.
- Contact your Franklin Templeton Retirement team for TDF review resources and help with best practices.
- Following the above process with prospective plans is a good strategy if your retirement practice is in growth mode.
For additional information, please contact the Franklin Templeton Retirement Sales Department at (800) DIAL BEN/342-5236.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Principal invested is not guaranteed at any time, including at or after a fund’s retirement target date; nor is there any guarantee that the fund will provide sufficient income at or through the investor’s retirement. The investment risk of the retirement target fund changes over time as its asset allocation changes. Investments in underlying funds are subject to the same risks as, and indirectly bear the fees and expenses of, the underlying funds.
Equity securities are subject to price fluctuation and possible loss of principal. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Alternative strategies may be exposed to potentially significant fluctuations in value.
Active management does not ensure gains or protect against market declines.
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