How can you help members make appropriate diversified choices?
First and foremost, plan sponsors are expected to provide investment options that will allow plan members to invest according to their personal risk tolerance and goals. To do that, the plans may offer balanced funds as part of the lineup. The challenge with balanced funds is that the asset mix doesn’ t materially change, which means the risk profile may be appropriate for someone at age 30, but it won’ t change as the member ages. The reality is that most members rarely rebalance or change their allocations over time, preferring to stick with their original allocation decision. In other words, the investment decision they make at 30 may still be in place when they are 50.
What issues do target date funds address?
Although not perfect, because TDF’ s automatically become less risky over time, the fact that plan members may not pay attention to their investments doesn’ t matter as much because the portfolio is automatically changing for them.
Interestingly, TDFs are now also a common default option in DC plans and typically garner the newest contributions.
What are the disadvantages of TDFs?
The disadvantages of the TDF structure are that they tend to be more expensive than other options. They also assume all participants in the fund have the same risk tolerance and that the plan member does not control the asset mix.
Are TDFs the perfect solution?
TDFs may not be a perfect solution for all plan members but they are a real step forward in simplifying the investment decision. For plan members that want a‘ set it and forget it’ option, TDF’ s can really fit the bill.
For more information on what target date funds are available for your plan or to learn more about the solution, please contact your Proteus consultant.
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Compliance: Avoid Pension Pain
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