Quick Summary
The target date series is often a 401(k)'s default investment and can hold a large share of plan assets. Series with the same year on the label can differ meaningfully in glide path, cost, and structure. Sponsors should compare "to" and "through" glide paths, active and index approaches, fees, and potential conflicts with proprietary series. The Department of Labor expects a documented process for selecting and monitoring the series.
In many 401(k) plans, the target date series quietly becomes a central investment on the menu. It is often the plan's default investment, so every employee who is automatically enrolled or never picks a fund lands there. Over time, a large share of plan assets can end up in a single family of funds.
That makes choosing the series one of the bigger fiduciary decisions you will make. Yet many sponsors inherit whatever series the recordkeeper offered when the plan was set up and never revisit it.
What a target date fund is
A target date fund is a single fund built around an expected retirement year, such as 2045 or 2060. It holds a mix of stocks, bonds, and other investments. As the target year approaches, the fund gradually shifts toward a more conservative mix. That planned shift over time is called the glide path.
The appeal is simplicity. A participant picks the fund closest to their expected retirement year, and the fund handles diversification and rebalancing.
The catch is that two series with the same year on the label can behave very differently. A 2040 fund from one company can hold a noticeably different amount of stock than a 2040 fund from another.
The Department of Labor's guidance
In 2013, the Department of Labor published tips for ERISA plan fiduciaries on selecting and monitoring target date funds. The themes still apply:
- Establish a process for comparing and selecting series
- Review each fund's prospectus and disclosures, including the glide path
- Understand the fees and investment expenses
- Ask whether a custom or non-proprietary option would better serve participants
- Develop clear employee communications
- Document the process
The DOL did not say which series to choose. It said to have a process and to write it down.
"To" versus "through" glide paths
One of the first structural questions is where the glide path ends.
A "to" glide path reaches its most conservative mix at the target date and stays there. The thinking is that many participants withdraw their money at retirement.
A "through" glide path keeps adjusting for years after the target date, often holding more stock at retirement. The thinking is that many participants will draw down their savings over a long retirement.
Neither approach is right for every plan. The better fit depends on your workforce. Do employees tend to roll money out when they leave? Do they retire early, late, or gradually? Is there a pension or other retirement benefit in the picture? Understanding how your people actually use the plan should guide the choice.
Active, passive, or blended
Target date series are built from underlying funds. Some use actively managed funds, some use index funds, and some blend the two.
Index-based series generally cost less. Actively managed series aim to add value through manager decisions, at a higher cost, with no assurance that they will. Blended series try to balance the two. Your Investment Policy Statement should describe how you weigh cost against other factors, so the decision rests on criteria rather than preference.
Fees and investment vehicle
The same series may be available in several forms, including mutual fund share classes and collective investment trusts (CITs). CITs are available only to qualified retirement plans and often carry lower costs than comparable mutual funds. Your recordkeeper's platform and your plan's size will affect what is available to you.
Because so much money sits in the target date series, small differences in cost have an outsized effect on participants. Fees should be reviewed along with the rest of your lineup during regular fee benchmarking.
Proprietary series and conflicts
Some recordkeepers offer their own target date series, or make it easier or cheaper to use one. That is not automatically a problem, but it is a potential conflict of interest, and the decision deserves extra scrutiny. Ask whether the series would have been chosen on its merits if it came from an unrelated company.
How participants actually use them
Target date funds are designed to be used alone. A participant who puts 30% in a target date fund and splits the rest among other funds has effectively built a different portfolio than the one the target date fund was designed to provide.
Plan communications should explain this plainly. Re-enrollment, in which participants are moved into the default investment unless they choose otherwise, is one tool some sponsors use to bring participant allocations back in line. It comes with its own communication and fiduciary considerations.
Monitoring over time
Choosing a series is not a one-time decision. Your ongoing review should look at:
- Changes to the glide path or the underlying funds
- Manager or leadership turnover at the fund company
- Fees compared with peer series
- Risk and return compared with series that use similar glide paths
- Whether the series still fits your workforce
Comparing a series only to its broad category can be misleading, because series with very different glide paths can land in the same category. Comparing against series with similar stock exposure at each age is usually more informative.
Documenting the decision
As with every fiduciary decision, the record matters. Keep meeting minutes that describe which series were considered, which criteria were applied, and why you made the choice you did.
Want a second look at your plan's target date series? Brian Williams, CPFA®, of Northshire Consulting LLC | Registered Investment Advisory Firm meets with business owners to review their investment lineups. Call 203-401-6062, email bwilliams@northshireconsulting.com, or visit northshireconsulting.com to schedule a plan review.
Frequently asked questions
Does the target date series have to be our plan's default investment?
No. A plan can use another qualified default investment alternative, such as a balanced fund or a managed account service. Target date funds are a common choice because they adjust with age.
How often should we review our target date series?
It should be part of your regular investment review, which many plans hold quarterly or at least annually, with a deeper comparison against other series every few years.
Can we switch to a different target date series?
Yes. Switching requires advance notice to participants and coordination with your recordkeeper, and the reasons for the change should be documented in your fiduciary file.
This material is for educational purposes only and is not individualized investment, tax, or legal advice. Advisory services are offered through Northshire Consulting LLC | Registered Investment Advisory Firm.