The current bull market is nearly 10 years old. Unemployment is low in many industries, there are more 401(k) millionaires than ever before and wage growth is looking up. Anyone saving in a 401(k) is likely doing pretty well right now.
However, markets don't maintain an upward trajectory forever. And in the world of employer-sponsored retirement plans, negative returns and fiduciary risk are positively correlated.
Remember that the uptick in lawsuits associated with employer-sponsored retirement plans has occurred during a bull market. It doesn't take a rocket scientist to see that when the market takes a turn, we're likely to see the stream of new lawsuits maintain their current pace or even increase.
As retirement plan advisers, what are we to do? Bank on positive returns or start considering a more restrained approach with our recommendations, especially with the target-date-fund suites our clients are using?
With an ever-increasing percentage of plan assets going toward target-date funds, advisers should be working with plan-sponsor clients to ensure that the target-date suite they have is right for them. And before advisers do that, they have to ensure they're using the right tools.
Since the Department of Labor issued guidance in 2013 on TDF selection and monitoring, there's been a proliferation of tools available from record keepers, asset managers and software companies to help plan sponsors keep these guidelines in mind and make the best choice for employees.
Here are some important tips for advisers deciding which target-date review tool to use.
First, will the system be able to account for the demographic and less quantifiable aspects of the employee population? For instance, if the population in one of your plans has large account balances, high savings rates and skews older, that should be accounted for when reviewing the target-date funds you recommend.
My firm had two clients with similar characteristics from the perspective of plan assets, cash flow and average account balances. But upon closer examination, the employee populations were very different: One consisted of medium-wage employees with long tenures at the company and had a much higher medium average age; the other company had merged a collection of businesses together and had higher-compensated employees who skewed much younger. As a result, the same glide path wouldn't be appropriate for both.
Second, can the system you use incorporate collective investment trust funds? The use of CITs is exploding within the defined-contribution space and among advisers. Not being able to incorporate their performance and characteristics could be a hindrance to providing a robust review of the target-date landscape for clients.
Third, how easily digestible is the target-date report for plan sponsors? Albert Einstein once said, "Everything should be made as simple as possible, but not simpler." Advisers get the opportunity to work with sophisticated human resources and operations employees, but managing the 401(k) is not their only job function. Being able to communicate the benefit of one target-date suite in a digestible and defensible manner should be your goal with this tool.
As I mentioned above, we're currently in a bull market, but that doesn't seem to be stopping the barrage of lawsuits against plan sponsors. When the market turns, it is likely that this trend will accelerate, not disappear, and advisers had better be prepared ahead of time.
Aaron Pottichen is the senior vice president of Alliant Retirement Consulting.