Comments on: Thoughts on Morningstar’s Target Date Fund Research

By: Mike Kane, ChFC, AIFA

Mike Kane, ChFC, AIFA — Fri, 09 Apr 2010 11:32:22 +0000

Mike and Ryan: As you guys know the DOL, after a request by Marcia Wagner of the Boston Law Group, has responded with DOL Advisory Bulletin 2009-04A. This Bulletin, according to a senior DOL official in the SE, will become part of their audits/investigations. The Bulletin requires all Plan Sponsors who have proprietary target date funds in their lineups to perform due diligence on the TDF’s. Getting at the expenses, glidepath appropriateness, transparency of the underlying investments, asset allocation etc is now on the plan sponsors. Most are totally unprepared to deal with this.

By: Ryan Alfred

Ryan Alfred — Tue, 30 Mar 2010 17:22:00 +0000

@Dave – Thanks for your comment. I agree with you that vigiliance is warranted. It will be interesting to see how this “open” vs. “closed” debate plays out. It’s definitely a new battleground that is different (though related)to the “to” vs. “through” debate. The bottom line is that TDF distribution still drives TDF fund design and if you have solid distribution you are more likely to stay closed, more likely to have a more aggressive glidepath and more likely to use more active management. In this case it is actually more pernicious than investor inertia because in many cases the plan sponsor can only use the proprietary target date fund of their recordkeeper and can’t change it even if they try.

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By: Dave Ehrenthal

Dave Ehrenthal — Mon, 29 Mar 2010 23:41:22 +0000

This is excellent analysis and highlights the fact that all target date funds are not created equal. As more plan sponsors opt for target date funds as their plan’s QDIA, vigilance is indeed warranted for fiduciaries. Ceteris paribus, how could we ever expect the majority of closed funds to equal or beat the performance of open target date funds? The choice of non-proprietary funds must enhance performance since I suspect few fund management companies can claim to offer best-of-bread funds for every asset class. Moreover, how could the financial incentive to include more profitable, proprietary funds, not include fund selection and asset allocation? While long term performance must be on the minds of target date fund managers, my impression is that most investor behavior is driven by inertia and therefore the risk of net outflows is low. Please correct anything that I said that is wrong and you disagree with!