Saturday, July 11, 2015

5 Things You Should Know About Target-Date Funds

In a remarkably short period of time, target-date funds have become an integral component of the typical 401(k) menu, and a growing share of 401(k) plan assets — particularly those of newly hired 401(k) plan participants — are being directed to TDFs.

Whether you are a plan fiduciary evaluating the TDF option(s) on your plan menu — or a 401(k) plan participant being defaulted into a TDF option — here are five questions to which you should know the answers about your TDF investment.

1. What is the ‘appropriate’ asset allocation?

This is the million-dollar question for target-date funds. At a high level, this is no more complicated than deciding what is the right mix of stocks and bonds, international and domestic, alternative investments and/or cash for investors at every stage of their investing life — or than picking the firm(s) that you trust to know what that right mix is.

2. How much of what is on your glide path?

The “glide path” sounds like a complicated concept, but it is actually nothing more than how the shifts in asset allocation take place over time. It is the path that these investments take your money on throughout your investing life. Still, for some funds — particularly newer, smaller funds — the asset-allocation strategies outlined in the fund prospectus or fact sheet may still be “aspirational,” may not yet incorporate all the specific strategies that the fund manager has in mind for that time in the future when the funds achieve a certain critical mass. You need to know what the targets are — and know if those targets are part of the current strategy.

3. Are the funds composed of proprietary offerings, or are they ‘open architecture’?

The “debate” over the relative advantages of open architecture versus proprietary offerings has long been part of retirement plan administration choices, and it is part of the target-date decision as well.

Those advocating the benefits of open architecture generally tout the ability to pick “best of breed” investment solutions (while readily being able to dump those that fall short), backed by the notion that no one firm can possibly be that best choice across every asset class. Those pushing proprietary choices take issue with that latter point, while pointing to the benefits of their intimate knowledge of their own product set — not to mention the relative cost efficiencies of a proprietary product. There is no one single right answer, but the determination should be part of your evaluation.

4. How much does it cost?

Target-date funds are often constructed as a fund comprised of other funds, and — particularly when a provider incorporates other funds in their offerings, they frequently charge some kind of fee for their expertise in putting together those other funds. This is a fee generally applied as some kind of basis-point charge in addition to the other, regular fees charged by the underlying funds. You will want to know what this charge is, if any, and consider it as part of the total cost of your selection. This fee is generally smaller (sometimes there is no extra charge) for proprietary-only offerings.

Beyond the aforementioned “wrapper” fee, TDFs — particularly mutual fund TDFs — will generally have all the same kinds of fees typically associated with retirement plan investments. Bear in mind that some of the fund allocations may include some relatively exotic asset classes — and those may carry higher expenses than you are accustomed to seeing. Additionally, you may find some retail share class funds included, even in institutional share class offerings. The bottom line: Keep an eye on the bottom line.

5. How should I measure ‘success’?

It wasn’t all that long ago that there were no benchmarks to speak of in this space (other than those constructed by the firms managing those funds). These days the passage of time, and the expansion of the market, have produced several credible benchmarks against which the performance of the funds can be evaluated.

But take note: The benchmarks can be as varied in their underlying philosophy and construction as are the funds themselves. That’s why it is important to first know what you believe about the approach, glide paths, and/or asset allocation before you pick the benchmark.

- Nevin E. Adams, JD

You may also want to check out the Employee Benefits Security Administration’s (EBSA) “Target Date Retirement Funds — Tips for ERISA Plan Fiduciaries” at

Saturday, July 04, 2015

The Course of Human Events

It is easy, looking back, to gloss over just how remarkable was the sequence of events that made this nation’s independence a reality. The bickering and machinations of the Continental Congress in 1776 were every bit as unpleasant, and unproductive, as the worst of today’s elected officials — even though, and perhaps in some measure because, hostilities with Great Britain had officially been underway since the so-called “shot heard ‘round the world” the preceding spring.

The men who gathered in Philadelphia that summer to bring together what was not yet a “new nation” came from all walks of life. Still, it seems fair to say that most had something to lose, both financially and in terms of the personal liberty they advocated as an “unalienable” right. True, many were merchants (some wealthy, including President of Congress John Hancock) already chafing under the tax burdens imposed by British rule, and perhaps they could see a day when their actions would accrue to their economic benefit. But they could hardly have undertaken that declaration of independence without a very real concern that they might well have signed their death warrants.

Ironically, despite the celebrations on the 4th, the resolution that declared that “these United Colonies are, and of right, ought to be, Free and Independent States” was approved by the Continental Congress on July 2. In fact, only President of Congress John Hancock and Charles Thomson, secretary, signed it on the 4th (the former famously in a hand “large enough for King George to read without his spectacles”). Most of the 56 delegates didn’t sign it for another month. One didn’t sign until 1781.

Of course, that “declaration” didn’t magically make it so. The winter at Valley Forge and many other disappointments still lay ahead. The surrender of Cornwallis at Yorktown was still more than five years off, and an official end to the hostilities would not come until two years after that, in 1783.

This week most will commemorate the declaration of this nation’s independence as a unifying experience. And yet, just “four score and seven years” later, as the nation approached another Independence Day celebration, President Abraham Lincoln would find himself in the middle of an enormously unpopular war fought to keep the nation together, even as two massive armies converged at a crossroads community called Gettysburg.

Even in 1776, historians have suggested that only about a third of the colonial citizenry actually favored independence, while a third remained loyal to Britain — and the remainder apparently just wanted to be left alone.

It seems only right then that today, as part of this “course of human events” and perhaps particularly at this time when our nation seems so deeply divided on a number of issues, that we remember not only the differences, but the sacrifices, large and small, that have made this great nation possible.

- Nevin E. Adams, JD

You can read more about the Declaration of Independence here.

Friday, July 03, 2015

4 Steps Toward Financial Independence

While retirement and retirement savings may not be high on your Independence Day weekend agenda, it can be a good time to focus on things that have been pushed aside for more pressing priorities.

Here are four steps you can take this weekend that can help put you on the road to achieve financial independence.

1. Figure Out How Much You Need

Yogi Berra once famously noted that if you don’t know where you’re going, you might not get there.
Effective savings strategies start with a goal, something to aim for. For many, retirement savings goals seem impossible to set. After all, there’s no “blue book” on the cost or quality of retirement — no single answer to the question, “How much do I need?” As a result, many people fear that their estimates “aren’t even in the ballpark” of what will be required. The 2015 Retirement Confidence Survey affirmed a long-standing trend — that most haven’t made even a single attempt to figure out what they might need for retirement.

There are, however, tools that can help you set a reasonable target. If your workplace retirement plan doesn’t currently provide that option, the Ballpark E$timate at is free, thorough, and won’t require much of your weekend to come up with a target based on your individual circumstances.

2. Rebalance Your Account

While a growing number of individuals take advantage of strategies like managed accounts and target-date funds — options that are regularly rebalanced by investment professionals — to invest their 401(k) balances, many workers (especially older ones) still make individual fund selections, either on their own or with the help of an advisor. The problem is, we’re often too busy to go back and review those decisions. Unfortunately, left unattended too long, market movements can leave even the best investment choices out of balance and produce results that are unintended.

If you haven’t rebalanced your account in a while (or can’t remember when you did), take advantage of the long weekend to do so.

Note: if you are using a strategy like a target-date fund, balanced fund or managed account with your workplace plan, you shouldn’t need to rebalance. And if you’re not using one of those options, this might be a good opportunity to consider making a change.

3. Bump Up That Contribution Rate

Like those investment choices, most of us make a decision about how much to save once, frequently when we first join the plan. At that time you may have chosen that rate based on the employer match, or the rate that the plan automatically enrolled you, or perhaps even just the amount that you thought you could afford at the time. Odds are you haven’t changed that rate since that very first time, however — and if you didn’t make that decision based on an assessment of how much you needed to provide a financially secure retirement (see #1 above), it may not be enough.

So, take that rate and consider increasing it — by at least 1%, or more if you can.
And make a point of increasing that savings rate annually.

4. Give Your Plan an Annual Check Up

It may seem obvious, but once you have figured out how much you’ll need to live on in retirement, you need to see if you are on track to achieve that goal. So pull out those retirement plan statements, take a look at your current rate of savings, how you’re invested, the amount of the employer match, and your remaining years of saving/investing, and see how far that takes you in achieving the goal you set above.

If your current approach leaves you short of that goal, consider alternatives — saving more, for instance, or in a way that allows you to maximize your employer match. The tool you used to forecast your needs should also be able to help you see the impact that changes in your current savings strategy can make.

Then remember that things change. Whether it’s your health, your family, your income, or your place of residence, your plan needs to keep up with your needs and expectations.

While you don’t need to constantly reassess, even if there aren’t major changes it’s a good idea to check it out at least once a year — and why not on a long weekend?

Regardless, always consider seeking the help of a qualified expert advisor to help you make the decisions that will allow you to celebrate your own financial independence!

- Nevin E. Adams, JD