Sponsors are saying target-date funds can reduce liability as well as offer a good asset allocation model. Most agree that target-date funds are a good way to help not-so-savvy investors and in doing so they offer some protection from lawsuits as an added bonus.
Ron Lee, trustee for Hawaii-based St. Francis Healthcare Systems, said target-date funds limit the risk a sponsor has to assume when used as a default option. Target-date funds ease the fiduciary burden because they take a lot of factors surrounding due diligence out of the picture. "It's a lot less to worry about," said Lee. He did not specify what firm provides St. Francis' target-date funds.
David Wray, president of Profit Sharing/401k Council of America, said out of 1,052 plans surveyed in 2004, 8.6% used some form of target-date fund as the default option. Wray anticipates that number will be higher when the 2005 survey comes out later this year.
Sherwin Kaplan, an attorney at Thelen Reid & Priest, said the problem with money market funds is that while safe, they have historically low returns and a participant could always argue the sponsor missed out on growth by defaulting him in to them. Another issue is that as a fiduciary, a sponsor must act in the best interest of the participants. It could be argued that money market funds do not fulfill that requirement.
If all a sponsor knows is the age of the participant, the target date fund is the bet way to act as a prudent steward of a participant's assets. "You will never find a reputable investment manager who could testify that over a long period of time it's a good idea to put 100% of a person's assets into a stable value or money market fund," he said. Yet that is precisely what happens with some participants.
Kathy Larson, benefits manager for California Portland Cement, agreed that money market funds are opportunities to get second-guessed. "I can see someone asking, why didn't you do this or that? And not having an answer," says Larson. "The kind of automation that occurs in target-date funds eases the burden we face as administrators." She said the cement manufacturer recently added The Vanguard Group's target date funds.
Vendors seem to agree with this logic. James Cornell, senior v.p. of plan sponsor strategy for Fidelity Investments, said target-dates funds have better long term returns. As a fiduciary choosing them as a default is the better and more prudent decision. "The consensus we've seen is that it's better to embrace that risk today and help participants achieve a better outcome," he said. "Target date funds allow a better asset allocation model and offers better mixes of funds." Target date funds also increase participant satisfaction--making it less likely one will want to sue the sponsor or fund firm. "It has allowed plans to individually target within plans because they are based on participants age. Stable value funds really just treat everyone the same."