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Ronald Surz, PPCA (2 clicks)
Hedge fund analyst, registered investment advisor, pension fund manager
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DoL Tips provides several opportunities for investment advisors.

Target date funds have grown phenomenally in the past 5 years from virtually zero in 2007 to about $1 trillion today, half in mutual funds and the rest in custom funds and collective investment trusts. And it's just beginning. Now is the time to get on board if you haven't already. According to a Recent Study by Casey Quirk and Associates, target date funds will represent half of the roughly $8 trillion in defined contribution assets by 2020. Casey Quirk partner David Bauer says "There is tremendous opportunity but managers must thoroughly examine the market complexities before jumping in."

We've been waiting for 4 years, ever since the joint SEC-DoL hearings in June of 2009, for guidance, so this new document is a very big deal. In the following I first suggest ways that advisors can benefit from the DoL's tips. Then I summarize the key points in the guidance with comments directed to financial advisors.

Some of the opportunities for advisors arise from dispelling commonly held misperceptions about safe harbors. This new document from the U.S. Department of Labor clears up two widespread safe harbor misconceptions: (1) It's not true that any Qualified Default Investment Alternative (QDIA) will do - you need to vet your selection, and (2) "safety in numbers" is not "safe in reality," so T. Rowe, Fidelity and Vanguard do not provide fiduciary insulation. Even worse, mutual funds are not plan fiduciaries.

This guidance can be a threat or an opportunity for financial advisors. Advisors can ignore it, or embraced it, but if you don't capitalize on this opportunity, someone else will. Here are some of the ways advisors can benefit:

  1. Gather comparisons of the Big 3 providers to competitors, for example from the Center for Fiduciary Due Diligence. Provide a service to vet target date funds, especially potential alternatives to the Big 3. Consider Collective Investment Funds (CIFs) for their lower costs and fiduciary protection. CIFs stand as fiduciaries to the pension plan whereas mutual funds do not.
  2. Create custom target date funds using non-proprietary funds on the client's existing platform.
  3. Document the risk you think is appropriate for the average participant at their retirement date, and whether or not they are sophisticated enough to understand the risks.
  4. Develop a statement of investment policy.
  5. Brag about implementing the DoL guidance because it's good fiduciary practice. Good for you and good for your client.

The specific DoL tips are as follows:

  • Establish a process for comparing and selecting TDFs, including reviews of fund prospectuses. My personal addition to this tip is to note the objectives that are stated in prospectuses. You'll be surprised to see that they are not pay replacement and longevity risk, which are the "objectives" used to market TDFs. The reality is that these marketing "objectives" are actually hopes. An "objective" without a realistic plan is a hope. Accordingly, prospectuses do not contain these hopes.
  • Establish a process for the periodic review of selected TDFs, especially adherence to the stated strategy and progress toward achievement of objectives. Again, please note that stated objectives in prospectuses are typically as shallow as "earn a return commensurate with the risk" or "track the asset allocation glide path on page xx."
  • Understand the fund's investments - the allocation in different asset classes (stocks, bonds, and cash), individual investments, and how these will change over time. This speaks to the very important glide path. Like everyone else, the DoL believes that there is a difference between "To" funds and "Through" funds, but they're wrong. You can see why at To versus Through.
  • Review the fund's fees and investment expenses. Be sure to include the fees for the underlying funds as well as the fees to manage and administer the TDF. The impact of required fee disclosures is yet to be felt. Stay tuned.
  • Inquire about whether a custom or non-proprietary target date fund would be a better fit for your plan. This is your invitation to customize a solution, to build something special for your clients. It's a gift to advisors.
  • Develop effective employee communications. Tell employees what you have done and why. Another gift from the DoL to advisors.
  • Take advantage of available sources of information to evaluate the TDF and recommendations you received regarding the TDF selection. Another advisor opportunity, as stated above - TDF due diligence.
  • Document the process. The DoL guidance concludes with a recommendation that the selection and monitoring process be documented. You should have an investment policy statement. TDFs are employer-directed rather than participant-directed so the overall IPS does not do the job because it is focused on supplying choices for the participant, whereas TDFs are chosen by the fiduciary.
Source: Department Of Labor Tips Create Opportunities For Investment Advisers