In recent years, many retirement plan sponsors have enhanced retirement plans by introducing target-date funds (TDFs) to bolster employees’ retirement readiness. Whether you are a dentist participating in a retirement plan, a practice owner sponsoring a plan for employees, or a dentist considering sponsoring a plan for yourself or for others, it is important to understand this investment option.
TDFs are investment vehicles that automatically reset their asset allocations over time to maintain a risk profile that is appropriate for a particular investor’s retirement target date. Generally, the name of each TDF in a series includes a specific year, such as 2020 or 2030. Plan participants choose a fund named for the year closest to their desired retirement year. From that point on, professional money managers handle the investment decisions, such as selecting individual securities for the portfolios and rebalancing the fund’s asset allocations so that they become increasingly conservative as a participant gets closer to retirement.
Target-date funds (TDFs) typically invest in other investments and are designed for investors who are planning to retire during the target-date year. The fund’s target date is the approximate date when investors expect to begin withdrawing their money. A TDF’s investment objective/strategy typically becomes more conservative over time primarily by its allocation to equity investments and increasing its allocations in fixed-income investments. An investor’s principal value in a TDF is not guaranteed at any time, including at the fund’s target date.
Rapid adoption rates
Over the past several years, TDFs have had a rapid ascent in the defined contribution plan space. As reported in a February 2018 Pensions & Investments article, it is estimated that by 2021, TDFs will garner more than 85% of total defined contribution plan participant contributions; they currently account for over 20% of total 401(k) plan assets.
Simplicity for participants, heightened oversight for sponsors
Plan participants gravitate to TDFs for their simplicity. For instance, 84% of participants surveyed recently cited the risk management and asset allocation features of the funds as being “very important,” while 42% were attracted to TDFs’ built-in, “set-it-and-forget-it” diversification qualities.
The introduction of TDFs, especially when used by plan sponsors as a default investment option also known as a qualified default investment alternative, can heighten plan sponsor oversight since qualified default investment alternatives are an appropriate investment option when a plan participant does not make an investment choice.
Key selection considerations
When evaluating the best TDF series to use as the default investment option for their retirement plan, plan sponsors may consider factors, such as:
Participant demographics. Understanding the makeup of your participant population is the first step in selecting a TDF family. What is the average age of the participant population and does it skew toward younger or older workers? What is the average deferral rate and account balance? What is the average compensation level? These and other variables may influence your selection decision.
Glide paths. The term glide path refers to the formula that dictates the asset allocation mix of a TDF. Each family of TDFs has a unique glide path structure that determines its potential risk/return profile. As a general rule, when assessing the glide paths of various TDF families, spend some time assessing the specifics of their asset allocations. Determine what the minimum and maximum equity and fixed income allocations of the funds are and how they shift over time. Furthermore, some glide paths freeze asset allocations at fixed percentages once the target date is reached, while others remain active, continuing to adjust allocations well into the retirement years—long past their target dates.
Setting up the retirement plan you need
TDFs are available through the ADA Members Retirement Program. Plans can be established for as few as one-person practices or many employees in a practice with a variety of retirement savings and distribution vehicles through AXA Equitable that can assist you in achieving your goals. With more than 50 years of experience working with ADA members, AXA Equitable can help you review your options and offer you choices that will alleviate the burden of establishing and managing a retirement savings plan. It is one of the ways the ADA makes it easier for you to focus on doing what you do best: dentistry.
Call 1-800-523-1125 to speak with a Retirement Program specialist or visit us at ADA Members Retirement Program to learn more about TDFs and how you can start saving today.
Mr. LoPorto is senior director and client relationship manager at AXA Equitable. He has more than 25 years of experience in the retirement and financial services industry.