ERISA PLAN ADVISOR

How is Your Target Date Fund Education Program?

For advisors and plan sponsors, I offer this question:  “How is your Target Date Fund (TDF) education program?”

Wait, what?  Are you asking about our 401(k)-plan education program?  Or do you mean how are our TDF’s?  Which one?

You heard me correctly!  For both advisors and plan sponsors, I am asking, “How is your TDF education program?”

In February of 2013, the Department of Labor and the Employee Benefits Security Administration published “Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries.”  It is a succinct three-page document which in my opinion, is very well written.  It contains a list of eight broad considerations for selecting and monitoring Target Date Funds for ERISA retirement plans.  While it is was written over eight years ago, it is still an appropriate and effective document for use today.

One of the eight considerations is to “Develop effective employee communications.”

Develop effective employee communications. Have you planned for the employees to receive appropriate information about TDFs in general, as a retirement investment option, and about individual TDFs available in the plan? Just as it is important for the plan fiduciary to understand TDF basics when choosing a TDF investment option for the plan, employees who are responsible for investing their individual accounts need information too.[1]

To be clear, the DOL publication uses the term “employee communication,” and does not necessarily refer to it as “employee education.”  You will find that ERISA generally mandates nothing in the way of employee education.  There are plenty of requirements for notices, information and disclosures, but just about nothing required in terms of education.  But it also uses the word effective” to describe the required nature of the employee communication.

In doing some homework for this article, I looked for references that document to what degree employees misunderstand how a TDF works.   Is there evidence to suggest that most plan fiduciaries are providing “effective employee communications”?  Suffice it to say, there was a plethora of references to indicate that employees do not understand the nature of target date funds.  To list a few:

  • Few employees use only a single TDF option as they were designed to work
  • Some employees think that investing in a TDF guarantees them an acceptable outcome for the date they select
  • Some employees think that TDF’s are designed to provide a better return than other pure equity options
  • Some employees think that TDF’s provide certain guarantees.

Imagine that you are on the wrong end of an ERISA class action suit regarding your selection and monitoring of target date funds.  One of your employees is called to testify in court.  Your employee expresses some or all of the above misunderstandings about what they believed a TDF was designed to do.  You say that your plan is too small to ever be involved in a class action suit.  Well … maybe.  Instead, imagine you are on the wrong end of an employee complaint and you have an investigator from the DOL in your office for a few days.  In your defense to either the court or to the DOL investigator, would you be able to show that you complied with all eight of the DOL’s suggested considerations for TDF’s. 

Would you be able to show that you “Developed an effective employee communication,” program for your employees regarding target date funds?  And in my opinion, the key word would be “effective.”

So. I ask one more time to both advisors and plan sponsors, “How is your Target Date Fund education program?”

Blog articles are provided for general information and education and should not be considered a recommendation.  Information provided should not be considered to represent investment, legal or tax advice.

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[1] Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries – US Department of Labor, Employee Benefit Security Administration, February 2013