Surprisingly, many plan sponsors have notimplemented any process to select target-date funds. (Photo:Shutterstock)

With the continued growth of target-date funds showing no signsof abating, retirement plan sponsors will want to review their planofferings to ensure they are meeting the savings needs of theiremployees.

Two important factors have contributed to the surge in targetdate funds:

1. They are often the default investment option for many definedcontribution plans
2. They are easy for most employees to understand.

The numbers below from research firm Cerulli Associatestell the story:

• 88% of new contributions, representing 35% of total 401(k)assets, will be invested in target-date funds by the end of thisyear
• Target-date fund investments will total $2 trillion byyear-end

While target-date funds are among the most common offerings indefined contribution plans, when you dig a little deeper you soonlearn they are also the most widely misunderstood:  byplan sponsors (many of whom believe they are all similar); byparticipants (whose understanding of how they work is all over themap); and even investment advisors (who may not have access to theresearch tools necessary to properly evaluate the funds forsuitability for participants).

We believe there is potential – and substantial – fiduciaryliability exposure for plan sponsors in this area, particularlywhen the next market downturn occurs.  This may be anupcoming focus of litigation, especially since the Department ofLabor has clarified how plan sponsors are expected toselect and monitor target-date funds.

Surprisingly, we've come across many plan sponsors who have notimplemented any process to select target-date funds.

You can't judge a target-date fund by its name because they arenot created the same. They can vary significantly in how managersallocate between equities and fixed income assets and the riskprofile of those securities.

The challenge is to help plan sponsors determine which ones arebest suited for their employees. Here's how you do it:

1. Review plan objectives when selecting target-datefunds.

This may seem like a no-brainer, but trust me, it's important totake this step. Companies have different needs when it comes totheir retirement plans. The risk profiles for employee populationsvary from employer to employer, and the target date funds offeredmust be based on participant demographics, risk and behavior.

The good news is that the DOL guidelines provide you a roadmapfor this step.

2. Research plan demographics.

Our research suggests that participants who make their owninvestment decisions don't maintain the appropriate assetallocation during the course of their working lives.

Many younger workers may not have enough exposure to equitiesgiven their long-term investment horizon, while older workers mayhave too much. There can also be a wide distribution in the equityexposure of participants within a similar age range.

That's why it's vital that plan sponsors and advisors obtain andanalyze retirement plan data to get an accurate picture of theinvestment needs of their participants. The results of thatresearch will guide you in determining the appropriate riskprofiles among the different target-date funds.

3. Analyze participant behavior.

Plan sponsors and advisors need to understand the investmentbehavior of participants and how they are using their retirementplans. Analyzing such behavior – for example, differences amongnewly hired single employees, employees with growing families andemployees nearing retirement – will shed light on their profile forrisk and preference for higher versus lower equity exposure nearretirement.

This type of pragmatic research can be applied to help selectthe most prudent target-date fund for a plan's specific goals andobjectives.

Target-date funds are an excellent option for employees who wantsimple and effective investment options to achieve their retirementgoals.

Following these tips will help ensure that employeesreceive the right mix of target-date funds that also pass thescrutiny of regulatory agencies.

Brad Knowles is managing director for HeritageRetirement Plan Advisors, a Registered Investment Advisor withthe SEC that specializes in providing fiduciary and investmentadvisory services to employer sponsored qualified and non-qualifiedretirement plans. Brad began his financial services career in 2001and founded his own retirement plan advisory firm, RBK Capital, in2014. Brad joined joined Heritage in 2016 and is one of around 50advisors nationally who have earned the Certified BehavioralFinance Analysts (CBFA) designation. Brad earned his Master ofBusiness Administration and Bachelor of Science degrees from theUniversity of Oklahoma.