Institutionalizing DC Plans: How target date funds have changed the landscape
A look at how target date maturity funds can be a route to the DB-ing of DC investment plans
Interview with Julia Durand, former Deferred Compensation Director, City and County of San Francisco Retirement System
Interviewer: David Grana, Head of North American Media, Clear Path Analysis
David Grana: Do target date funds make investing for retirement easier?
Julia Durand: If the point of a target date fund is to make investing for retirement simpler, then yes, absolutely they do that. Although, it has evolved into something bigger as it went from an idea of “set it and forget it” to participants having to select it, identify what type of investor they are, when they want to retire and how much money they would need for retirement. Target date funds were such a great idea in concept that they became the default investment choice for many plans. But with this, came an unrealistic expectation that these funds were going to be the panacea for financial planning when many of the plan sponsors’ appeal towards target date funds was the ease of getting non-participants started.
David: Are target date funds a one-size fits all solution?
Julia: There isn't and can't be a one size fits all for target date funds. One of the things that drove the target date funds for the 403(b) plan that I managed at CalSTRS was the realization that just because participants share the same birth date, doesn't mean they have the same risk tolerance. We then designed the funds based upon age at the time of retirement and risk tolerance and that worked well for our participants. We had 3 different plans for someone who was retiring at, say, age 62, which were aggressive, moderate or conservative. Even if they had the same pay check and birth date, people retiring at the same time could still have a different risk tolerance.
David: Have you seen many other employers offering the option based on risk tolerance?
Julia: We were the first and I didn't see many others using this type of Target Date option. Even in San Francisco (Deferred Compensation Plan) we didn’t offer this type of investment option.
David: Would additional education about target dates funds be helpful for investors?
Julia: When the IRS and Department of Labor get involved and they attempt to establish rules designed to protect investors and guide those who are hired to help investors,, (such as the 403(b) regulations that required disclosure), the unintended consequences of the most sweeping changes to 403(b) regulations in almost 50 years required plan sponsors to create books with all required disclosures, which a participant just isn't going to read. Participants barely read 30 seconds worth of information. Education has made things scarier. All of the small footnotes are a complete distraction and deters some participants from reading and learning more about their investments. I'm not sure that education solely is the answer.