Target Date Funds: Making Smart Decisions at Each Stage By: Jeff TylerCFA

The use of target date funds in retirement plans is skyrocketing. In fact, in just three more years, target date funds are projected to capture 88% of new retirement plan contributions and encompass almost 35% of all 401(k) plan assets.1 

This puts a lot of responsibility on you as a plan sponsor. As a result, it’s critical that you make informed decisions throughout the target date process, including:
• Selection
• Implementation
• Education 
• Monitoring 


As the Department of Labor (DOL) outlines in their tips2 on target date fund selection, there are many considerations in the selection process. 

“To” versus “through” glide paths. When making this decision, keep in mind that our research on 2.8 million participants in defined contribution plans3 shows that approximately 38% of target date fund investors stay invested in a target date product for a significant length of time beyond retirement.  By changing allocation for a period of time beyond estimated retirement date, “through” glide paths can continue to help meet the needs of these retirees.
Proprietary vs. non-proprietary. The DOL encourages plan fiduciaries to look at target date funds that include investments not managed by the investment provider. After all, target date funds are all about diversification; plan sponsors need to consider if they should have all their eggs in one basket—whether that basket is an asset class or a manager. 
Fees and expenses. The key here is value. Compare attributes of each TDF you consider. One that has higher expenses might deliver more value for that cost. When you look at the value a TDF provides, asset allocation and diversification of asset classes and perhaps underlying sub-advisors may jump out at you.
Selection and monitoring. The DOL suggests you establish and follow an objective process. It’s also important to document that process and save the monitoring information to support it.
Keeping participants informed. The DOL stresses the importance of participant education. Look for a provider with high-quality materials that are written in plain language and get delivered through various methods.


As you plan the implementation of a target date fund into your retirement plan’s investment lineup, consider making the target date fund the plan’s qualified default investment alternative (QDIA). When a participant enrolls in a plan (or is auto-enrolled—kudos to those plan sponsors) but doesn’t make an affirmative election to allocate their contributions, the QDIA is where their retirement funds are invested. 

If you’re also transitioning the plan to a new service provider, consider conducting a QDIA transition with a target date fund as the plan’s QDIA. That’s where you transition all participants into the related target date fund vintage based on their age and the plan’s normal retirement date (instead of mapping their investment elections to similar investments).

By choosing a QDIA, the plan fiduciary can enjoy a safe harbor from fiduciary liability in terms of how the undirected retirement funds are invested. The plan fiduciary may also benefit from increased participant satisfaction, as a target date fund can help reduce participants’ confusion and anxiety about investment option selections. 4


With the daily needs of working, taking care of kids and handling life’s other demands, how does one squeeze ‘learn about my employer’s workplace benefits, retirement plan, and its investment options’ into that mix? This challenge is why plan sponsors have to focus on education more than ever.

Education material can be broken down into content and delivery. The content should be written in plain language. Participants shouldn’t need a master’s degree in finance to learn how to allocate their retirement plan contributions. Look for benefit-oriented language the average person can understand.

As far as delivery, there are more methods of communication today than ever before. But not everyone has a smart phone, some people don’t have access to the Internet and some won’t read anything on paper. Look for a service provider that will look at how to provide a variety of methods to reach everyone.


The Department of Labor has outlined that a plan fiduciary has the responsibility to prudently monitor the investment options on a plan’s lineup. And although “monitoring” sounds like a fairly passive activity, there’s more to it than many people realize.

Monitoring isn’t just watching. Start by documenting what attributes you find important about target date funds and why you chose the one you did. Over time, you’ll need to periodically revisit these criteria and determine if they’re still valid and if so, if the target date fund you chose still meets those criteria.

The service provider you choose plays a critical role in monitoring the target date fund. Look for a service provider that performs extensive due diligence on the fund managers. Both quantitative (performance, attribution, and all those numbers) and qualitative (holding in-person reviews, watching firm turnover, etc.) are critical.

The bottom line

By plan sponsors providing access to professionally allocated and managed investments, target date funds can help plan participants with their investment decision. Retirement plan sponsors can benefit by making informed decisions throughout every stage of the target date fund process.

4 The ultimate decision as to whether a target date fund is an appropriate investment option for a plan and whether a target date fund can serve as a QDIA belongs to the appropriate retirement plan fiduciaries.

Investing involves risk, including possible loss of principal.

Asset allocation and diversification does not ensure a profit or protect against a loss. Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. These risks are magnified in emerging markets. There is no guarantee that a target date investment will provide adequate income at or through retirement.
Insurance products and plan administrative services are provided by Principal Life Insurance Company. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities are offered through Princor Financial Services Corporation, 800-547-7754, Member SIPC and/or independent broker/dealers. Securities sold by a Princor Registered Representative are offered through Princor®. Principal Funds Distributor, Princor and Principal Life are members of the Principal Financial Group®, Des Moines, IA 50392. Investment options may not be available in all states or U.S. commonwealths. May lose value.  Not a deposit. No bank or credit union guarantee. Not insured by any Federal government agency.

© 2015 Principal Financial Services, Inc.
t15120800f3 - t1509180qca – 12/2015

1“Retirement Markets 2014: Sizing Opportunities in Private and Public Retirement Plans”, Cerulli, November 2014.
2Target Date Retirement Funds - Tips for ERISA Plan Fiduciaries, February 2013,
3As of 12/31/2014


Jeff Tyler

Jeff Tyler is a Portfolio Manager for the Principal LifeTime and CIT Funds at the Principal Financial Group. He joined the firm in 2011. Previously, Jeff was the Chief Investment Officer at EXOS Partners, a financial advisory firm in San Francisco. Jeff began his career as an Institutional Fixed Income...

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