Simplicity, ease and convenience are words that are not usually found in the plan’s Investment Policy Statement as investment criteria.  A plan fiduciary’s first priority is to follow those investment policies and procedures that minimize their liability.

It is important to perform a thorough cost-benefit analysis to determine whether these arrangements really provide the benefits expected for all those involved: the fiduciaries, the plan sponsor, the participants and plan service firms. I also recommend that each company or organization look at its own data – such as average age at employment and average tenure by employee by occupational category – to see whether the assumptions meet reality.

Below are a few questions for retirement plan fiduciaries or those who work with plan fiduciaries to see if they have minimized their liability using lifestyle or target funds. One of the ways to test the answer is to put the fiduciary in a courtroom, so to speak, to see if he or she will satisfy the various rules and regulations. (The fiduciary should be able to respond appropriately to questions that begin with the phrase: “Please explain to the court . . .”)

• How do you monitor satisfaction of Investment Policy Statement criteria for a lifestyle or target fund that is a fund of funds?

• If your IPS has criteria such as category ranking or benchmarks for investment performance, how should these be applied to the lifestyle or target fund – for just the fund or for each of the sub-funds? Let’s say that the lifestyle fund you are considering is actually comprised of 5 sub-funds. Should the IPS criteria, such as manager tenure, be applied to each of those 5 funds?

• If the lifestyle fund is comprised of 5 funds, let’s say that 3 of the funds have excellent performance and 2 are dogs. What should you do?
• Are you or do you plan to have an auto-enrollment arrangement using lifestyle or target funds as the default investment? What is the default investment for auto-rollovers (between $1,000 and $5,000)?
  • If you are changing your default investment from a stable value or money market fund to a lifestyle or target fund, will prospectuses be distributed? Does your Investment Policy Statement include language about complying with ERISA 404(c)?Will your recordkeeper have to increase costs to supply and fulfill prospectuses?

  • If you use target funds as your default, what do you use as your retirement age assumption? For instance, would a newly enrolled 35-year-old get a fund “managed” for retirement in 2025 or 2030 (age 60-65)? How does that compare to the “normal” age when an employee leaves your company or organization?

  • Here is another way to frame this question: Please explain to the court why Joe’s money was placed in a fund managed as if he was going to be in that fund for 25 years even though 80% of your employees leave after 10 years and you don’t offer automatic rollovers into that fund when employees leave.

  • You have just hired two 35-year-olds: a union employee making hourly wages and an MBA executive earning six figures. Should they get the same default investment?

• Should the plan add lifestyle or target funds to a plan fund lineup which presently includes a balanced fund?
  • Presumably, the balanced fund manager is making allocations among different kinds of markets – stocks and bonds – based upon his or her analysis of those markets to try to maximize the fund’s investment performance relative to the risk taken. In a lifestyle or target fund, some of the allocation decision is taken away – either by the participant’s age or risk preference. What are the funds’ (balanced, lifestyle or target) alphas and sharpe ratios? (How well have the managers done in achieving risk-adjusted performance?)

  • Under what market circumstances do you believe that a participant’s age can determinate a fund’s market allocation BETTER than a balanced fund manager?

  • Do you believe that a participant’s risk profile completely matches with the risks in the stock and bond markets all the time?