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Northwest OH Legal Blog

Thursday, March 16, 2017

Use of Target Date Funds in Defined Contribution Plans

Target date funds first came to market in 1994. The enactment of the Pension Protection Act of 2006 (PPA) greatly expanded the growth of target date funds.

A target date fund, also known as a lifecycle, dynamic-risk or age-based fund, is a collective investment scheme( often a mutual fund or a collective trust fund) designed to provide a simple investment solution through a portfolio whose asset allocation mix becomes more conservative as the target date (usually retirement) approaches.

The PPA allowed plan sponsors to direct participants' retirement contributions to a target date fund if they did not choose otherwise. The Department of Labor (DOL) issued a fiduciary safe harbor for plan sponsors that chose to offer target date funds to their participants as a default investment option, known as a "qualified default investment alternative."

Plan sponsors have a fiduciary responsibility to monitor and evaluate target date funds like the rest of the plan investment options. To assist plan sponsors and investment committees, the DOL offers advice for ERISA plan fiduciaries with respect to choosing target date funds, including the establishment of a process for the periodic review of selected target date funds. The DOL requires that plan sponsors and fiduciaries periodically review the plan's investment options to ensure that they should continue to be offered.

Because target date funds come in all types, investment committees need to understand how their funds are composed. Asset classes and the associated asset allocations may vary significantly from one series of target date funds to another. Asset classes may typically include equities, bonds and other investment classes, such as real estate. Furthermore, within equities or bonds, there may be domestic, foreign and/or emerging market securities within target date asset classes.

Also, committees should understand the target date fund investment style, such as active, passive or a mix of those styles. For example, committees might consider an active style for equities and a passive style for fixed income investments.

Target date fund series should be a part of every investment committee review process much like any other investment option.


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With offices in Toledo and Lima, OH Allotta Farley Co., L.P.A. serves clients throughout northwest OH with various legal matters. Areas of service include Allen County, Ashland County, Auglaize County, Crawford County, Defiance County, Erie County, Fulton County, Hancock County, Hardin County, Henry County, Huron County, Lucas County, Marion County, Mercer County, Morrow County, Ottawa County, Paulding County, Putnam County, Richland County, Sandusky County, Seneca County, Van Wert County, Williams County, Wood County, Wyandot County.

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