On Friday, Investment News reported findings from a Janus Capital survey of retirement plan participants and sponsors. The focus: Target-date funds in defined-contribution plans.
The study also found that some plan sponsors did not apply the same level of due diligence to target date funds as other funds.
While 60% of plan sponsors said they evaluated individual target date funds and their underlying holdings when selecting a series of funds, 40% said they did not.
Now, that first set of findings--that many rank-and-file investors use target-date funds "off-label," by combining them with other investment options--typically unleashes a lot of tut-tutting from the financial services crowd. Having seen the composition of a lot of target-date funds, we reckon many of those investors are right...they aren't complete solutions.
Unfortunately, however, many retirement plans that include mediocre target-date funds will lack the complete investment lineup participants want (and need, whether they want it or not).
Now, it's certainly true that a large number of participants aren't clear on the all-in-one concept of target-date funds. And where participants find themselves trading investment vehicles around their target-date funds, they're likely to create more problems than they solve.
The important point here is that some participants have very good reason to view their plans' target-date funds as incomplete. Whether they can round out their portfolios effectively...well, that's another story.
On the question of plan sponsors and their due diligence, this is clearly problematic, and it's symptomatic of a larger shortcoming in the retirement plan marketplace: the informational asymmetry between busy, non-expert plan sponsors (i.e., buyers) on the one hand and financial services firms (i.e., sellers) on the other.
But let's stipulate that a given sponsor wants to perform the same due diligence on those target-date offerings. What are the appropriate criteria? In the fund-selection game, that question isn't any easier to answer in the target-date space as it is in the mutual fund space in general. What are the criteria? Past performance? Doesn't tell us much, and chasing the leaders tends to be a losing strategy. Expenses? That's a good place to start, but don't forget the hidden ones. Asset-class exposure? Sure, but isn't that a problem for investment professionals?*
Apparently Morningstar is going to take a swing at this by publishing ratings on target-date funds. Using an alliterative set of criteria--people, parent, performance, portfolio and price--Morningstar will try to help sponsors and participants make sense of the target-date universe. We'll reserve judgment on these ratings until we see them.
As always, however, there will be no substitute for dispassionate guidance, for sponsors and participants alike, from truly independent fiduciaries.
* Indeed it is, which is why the hiring of truly disinterested, fully independent, product-agnostic fiduciaries is so immensely important.
Sue Asci, "Target date funds shouldn't stand alone, most investors believe," Investment News, May 29, 2009
Caitlin Mollison, "Morningstar to introduce ratings on target date funds in 3Q," Investment News, May 28, 2009