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Target date funds are an increasingly popular option for 401(k) plans, but also come with increasing risk regarding fiduciary liability. A target date fund is an investment fund that contains an appropriate mix of investments, which will be adjusted over time, depending on the participant’s anticipated retirement date. Fiduciaries often view target date funds as a reasonable investment choice by default; however, plan sponsors must treat them as any other investment choice, and constantly review the investment outcomes, educate employees, and monitor the investment advisors.
Because most plans have an increasingly large percentage of assets in target date funds, there is a concentrated risk that requires even more consistent monitoring than less popular investment choices. Additionally, because there may be multiple layers of fees in a target date fund--for example, one fee for management of the target date fund itself, and additional fees for the management of the sub-funds within the target date fund--excessive fees should be a concern to fiduciaries. Finally, fiduciaries must make sure they are educated on selecting the appropriate target date fund for the population they serve, and must ensure they are educating participants on the advantages and disadvantages of selecting a target date fund.