In general, target-date funds have been a hit with 401(k) plans, but the losses suffered during the 2008 market meltdown by some funds designed for participants close to retirement have given companies a reason to reconsider their use of the funds. The losses "enlightened plan sponsors to the differences in the glidepath," says Mark Ruloff, director of asset allocation for Towers Watson Investment Services, referring to the evolution of the funds' asset allocation over the years. Ruloff notes that the equity allocation at retirement age can range from 20% to more than 60%.
The disparity reflects a philosophical difference. Some fund companies say that because participants could live for decades after retiring, they still need a more aggressive asset allocation. Others emphasize the need for a more conservative weighting.
The Department of Labor has proposed regulations that require more disclosure of the funds' glidepaths and investments. Of course, 401(k) participants are not known for their close reading of plan documents, so it's not clear such disclosures will make much difference.
Instead, experts say plan sponsors need to think about how their employees use the 401(k). "For a plan sponsor, basically the best they can do is have [the glidepath] vary based on their understanding of their participants and their retirement resources and ages," says Ruloff.
For example, if a company offers both a 401(k) and a traditional pension, he says, the income retirees get from the pension is similar to a bond investment, making it reasonable for the company to have a higher allocation to equities in the 401(k).
"The glidepath needs to be evaluated in the context of how participants use the plan and the demographics of the particular business or industry," says Don Stone, president of Plan Sponsor Advisors, a Chicago-based consultancy. If most employees retire at 55, a fund "that's designed to flatten out in terms of allocation at 80 or 90 may really be a bad fit," Stone says.
Ruloff and Stone say more and more big companies are coming up with a glidepath specific to the company and then putting together custom target-date funds. Stone says that if a 401(k) has "hundreds of millions" or more in assets, using custom target-date funds "is not particularly expensive."
The funds are not going away. A recent survey of more than 200 large employers by Aon Hewitt shows 83% offer either target-date or lifecycle funds in their 401(k)s, and more than a third of the remaining companies are considering doing so.
Despite the concerns about the funds, "they're better than what the average participant does on their own," says Stone.
For more on this topic, see Revising Target-Date Funds.