Target Date Fund Litigation

Recent litigation in the US challenging the prudence of plans’ target date fund offerings reiterates the importance of regular holistic reviews of target date funds. Continue reading the article below for more information. 


Recommendation

While Aon does not specifically comment on ongoing litigation, recent ERISA litigation claims challenging the prudence of plans’ target date fund (TDF) offerings reiterate the importance of regular holistic reviews of target date funds consistent with guidance from the Department of Labor1.

Aon recommends that clients regularly review their target date fund manager to verify and document investment prudence for plan participants. We have developed a 5-factor framework for TDF evaluation2 and accompanying demographic analysis3 to help plan fiduciaries determine the most prudent TDF for their plan. There are also several other ways we can help manage fiduciary risk including assistance with meeting minutes, providing fiduciary training, reviewing fiduciary liability insurance, and several other governance-related solutions.

Background

This new litigation trend provides the opportunity for DC Plan Sponsors to revisit current practice compared to guidance provided by the Department of Labor (DOL). In February 2013, the DOL published “Target Date Retirement Funds—Tips for ERISA Fiduciaries,” outlining eight suggestions when selecting and monitoring target date funds, suggesting that fiduciaries consider the “possible significance of other characteristics of the participant population, such as participation in a traditional defined benefit pension plan offered by the employer, salary levels, turnover rates, contribution rates and withdrawal patterns.”1 Recent litigation regarding target date fund selection show the importance of this guidance.

Whether selecting a TDF for the first time, conducting a replacement search, or undertaking a regular review of a plan’s TDFs, it is important to take a holistic view of the solution that includes more than just historical performance and fees.

There are no two TDFs created equally, and many factors affect both absolute performance as well as risk. Even when trying to overly simplify the universe into categories such as To vs. Through4 or Active vs. Passive (there’s no such thing as a passive target date fund5), it becomes obvious that even seemingly similar TDFs require balancing multiple factors – for example, potentially higher fees for a higher level of diversifying assets. This creates a series of trade-offs that must be solved, whether selecting an off-the-shelf product or implementing a custom TDF6 that could be a better solution for participants.

To help fiduciaries consider the prudence of a TDF for their plan population, we have developed a 5-factor framework2 to evaluate each differentiating factor of a target date fund. Further, our demographic analysis3, Population Engineering on Participant Likenesses (PEOPL) is able to determine risk level suitability of a particular glide path for a plan population based on demographic factors such as presence (or absence7) of a defined benefit plan, longevity, retirement age, and income predictability.8

Aon can provide several additional solutions other than investment reviews to help manage fiduciary risk including assisting with draft meeting minutes, providing fiduciary training, reviewing fiduciary liability insurance, and several other governance-related solutions.
To conduct a review of your target date funds or discuss other solutions to manage fiduciary risk, please contact your Aon consultant or a member of Aon’s Qualified Default Investment Alternative (QDIA) Research Team.


Reference Articles

1 A copy of the DOL’s memo can be found at: https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/target-date-retirement-funds.pdf1
2 Set It and Forgot It? Plan Sponsors Need Hands-On Engagement for Review of Solutions that Allow Participants to be Hands-Off
3 Reflecting Demographics in the Risk Level of Target Date Funds
4 Change the TDF Debate from “To vs. Through” to “Stay vs. Leave”
5 No Such Thing as a Passive TDF
6 Are Custom Target Date Funds Right for Your Plan?
7 Why Target Date Funds Should be Lower Risk for Populations without Defined Benefit Plans
8 Government, Education, and Utility Sectors Could be fit for an “Aggressive” Target Date Fund Glide Path

Note: Aon’s services do not constitute legal advice.


1 This site contains information that has been created, published, maintained or otherwise posted by institutions or organizations independent of AHIC. AHIC does not endorse, approve, certify or control these websites and does not assume responsibility for the accuracy, completeness or timeliness of the information located there.


Disclaimer

This document has been produced by Aon’s manager research team and is appropriate solely for institutional investors. Nothing in this document should be treated as an authoritative statement of the law on any particular aspect or in any specific case. It should not be taken as financial or legal advice and action should not be taken as a result of this document alone. Consultants will be pleased to answer questions on its contents but cannot give individual financial advice. Individuals are recommended to seek independent financial advice in respect of their own personal circumstances. The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto. The information contained herein is derived from proprietary and non-proprietary sources deemed by Aon to be reliable and are not necessarily all inclusive. Aon does not guarantee the accuracy or completeness of this information and cannot be held accountable for inaccurate data provided by third parties. Reliance upon information in this material is at the sole discretion of the reader.

This document does not constitute an offer of securities or solicitation of any kind and may not be treated as such, i) in any jurisdiction where such an offer or solicitation is against the law; ii) to anyone to whom it is unlawful to make such an offer or solicitation; or iii) if the person making the offer or solicitation is not qualified to do so. If you are unsure as to whether the investment products and services described within this document are suitable for you, we strongly recommend that you seek professional advice from a financial adviser registered in the jurisdiction in which you reside. We have not considered the suitability and/or appropriateness of any investment you may wish to make with us. It is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction, including the one in which you reside.

Aon Hewitt Limited is authorized and regulated by the Financial Conduct Authority. Registered in England & Wales No. 4396810. When distributed in the US, Aon Hewitt Investment Consulting, Inc. (“AHIC”) is a registered investment adviser with the Securities and Exchange Commission (“SEC”). AHIC is a wholly owned, indirect subsidiary of Aon plc. In Canada, Aon Hewitt Inc. and Aon Hewitt Investment Management Inc. (“AHIM”) are indirect subsidiaries of Aon plc, a public company trading on the NYSE. Investment advice to Canadian investors is provided through AHIM, a portfolio manager, investment fund manager and exempt market dealer registered under applicable Canadian securities laws. Regional distribution and contact information is provided below.

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