PLANSPONSOR - October/November 2018 - 50

Meeting Targets
Target-date funds (TDFs) continue to be the go-to default option for defined contribution
plans. Not all TDFs are the same, however, and it is critical for plan sponsors to make sure
they know exactly how the funds in their plans are structured.
T
his year marks the 12th anniversary of the PLANSPONSOR/
Janus Henderson Investors annual defined contribution (DC)
investment study, which analyzes information collected from
approximately 4,000 U.S. plans of all sizes. This year's results
indicate a continuation of the multi-year trend of plans selecting
target-date funds (TDFs) as the qualified default investment
alternative (QDIA) option for plan participants. Another finding,
however, seems to be that the most utilized TDFs tend to be made
up of funds from a single investment manager, and plan sponsors
this year are less confident than they were a year ago about how
well their employees understand and use TDFs.
A majority of plans - 63% overall - believe that TDFs are the
best QDIA for their plan participants, and that is most notable
among mega plans (those with more than $1 billion in DC assets),
where more than 90% say that TDFs are the best QDIA. Fewer plan
sponsors this year are " not sure " which QDIA option is best, which
is a good indicator that plan sponsors of all sizes are paying attention
to what investments are most appropriate. When plan sponsors are
choosing and evaluating their plan's QDIA, fund performance is still
the most important consideration overall, but smaller plans seem
to put more emphasis on performance than larger plans do. Mega
plans are more focused on investment allocation within the QDIA,
and plans of all sizes are together in placing high importance on the
quality of the underlying funds in the QDIA.
Time to Take a Look?
Despite the importance plan sponsors continue to place on having
high-quality funds within a QDIA, nearly half of plans (47.4%) that
have a TDF as their default are still using a single-manager TDF.
This far exceeds the percentage using multi-manager TDFs (13.9%)
and custom TDFs (8.7%). " Single-manager TDFs may have served
many plans and participants well thus far, but as with every investment
option embedded within a plan menu, these funds need to
be evaluated by plan fiduciaries regularly by means of a thoughtful,
deliberate process, " notes Russ Shipman, Managing Director and
Senior Vice President of Janus Henderson's Retirement Strategy
Group. " As participant assets continue to be defaulted into these
options, and the possibility of a market correction remains everpresent,
plan sponsors need to be sure they are directing participant
assets into appropriately diversified options, " he adds.
TDFs are generally structured to gradually decrease allocation
to equities - which are considered to be more volatile and thus
more " risky " - and increase allocation to " safer " fixed income
investments as the participant gets older and the TDF nears its
target (end) date. This year, only about 24% of plan sponsors are
monitoring the duration of the fixed income portion of their TDFs.
CO-SPONSORED RESEARCH
" As the workforce ages and more assets are accumulated in fixed
income instruments, it becomes even more imperative that plan
sponsors pay special attention to not just the equity portion within
TDFs, but to the fixed income component as well, " Shipman says.
" Definitionally, time horizons are shorter when fixed income allocations
ratchet up, so participants have less opportunities to make
up for performance missteps, "
he concludes.
" Ironically, it is
actually good
to see that plan
sponsors are
not brimming
with confidence
as we have seen
in the past. "
Confidence Drop
Despite the prevalence of TDFs
in DC plans and a long running
bull market - or perhaps because
of these factors - plan sponsors
are decidedly less confident this
year about a few things relating
to TDFs. For instance, last year,
almost 68% of plan sponsors
were " very confident " that their
employees were using the TDF
as a single, all-inclusive fund. This
year, that number dropped to less
than 26%. Similarly, when asked whether employees understand
the structure and intent of TDFs, just 25% of plan sponsors are
" very confident " versus 60% who were last year. Both are very
notable reductions given the breadth of plan sponsor respondents.
Plan sponsors are also less confident this year that the education
around TDFs is effective and that employees are selecting
the correct target date for their expected retirement. Confidence
remains high, however, that the plan's current QDIA is the best
option for the majority of employees. " Ironically, it is actually good
to see that plan sponsors are not brimming with confidence as
we have seen in the past, " observes Shipman. " Complacency is
the death knell when trafficking in plan oversight and all matters
fiduciary duty, and it appears those entrusted with such oversight
and decisions generally have an appropriate level of concern this
year - not overconfident, and not overly concerned either. " n
METHODOLOGY: In conjunction with PLANSPONSOR, Janus
Henderson Investors developed a series of questions for defined
contribution plan sponsors specifically pertaining to target-date and
QDIA fund knowledge, satisfaction, and construction. These questions
were included in the PLANSPONSOR 2018 Defined Contribution
Survey, which was conducted via an online questionnaire from July
to September 2018. More than 4,000 respondents participated in the
survey. For more information, contact surveys@strategic-i.com.

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PLANSPONSOR - October/November 2018

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