In a detailed new analysis, two ERISA attorneys make the case that fiduciaries are “responsible for the prudent selection and monitoring of” target date funds (TDFs) within defined contribution plans.
This Website Is For Financial Professionals Only
Safe harbor provisions for Qualified Default Investment Alternatives (QDIAs) do not relieve fiduciaries of their obligation to vet TDFs, according to this in-depth analysis
by attorneys Bernard T. King and Michael R. Daum of Blitman & King, published by Bloomberg Law.
Fiduciaries generally believe they are protected from litigation by two safe harbors in their selection of TDFs: Properly structured TDFs are Qualified Default Investment Alternatives (QDIAs) under the Pension Protection Act of 2006, and as long as they choose among the most popular TDF providers they should be OK.
However, relying on these two factors can lead to breaches of fiduciary duty that will bring lawsuits after the next economic downturn, as I explained last year in this article
about the Safe Harbor minefield.
The U.S. Department of Labor released a guide for fiduciaries concerning TDFs
in February that agreed with my analysis, and now two prominent ERISA attorneys have done the same. Here is a summary passage from the Bloomberg Law article:
“Regardless of whether the plan fiduciaries responsible for setting the plan’s investment lineup comply with Section 404(c)(5), or whether the mutual fund platform provider would qualify as a fiduciary, the responsible fiduciaries must understand the underlying details about the TDFs they are selecting as the plan’s QDIA. Although the fiduciaries can receive some protection from the QDIA safe harbor, they remain responsible for the prudent selection and monitoring of the TDF. Thus, at a minimum, the responsible fiduciaries should understand the TDF’s glide path, fees, and underlying assumptions. Then, having a general idea about the projected actions and attributes of the plan’s participants and beneficiaries, the fiduciaries should confirm that these characteristics are appropriate for the plan participants.”
For more guidance on selecting TDFs, see my Fiduciary Guide.