Whether your nonprofit is starting a 403 B Plan or you are reviewing your retirement plan investments, having Target Date Funds in the line-up is a good thing.
Why are Target Date Funds a good thing in a 403 B or Nonprofit Retirement Plan?
At Fairlight, we often find nonprofit employees asking us questions like “Where should I put my money” and “How often do I need to look at my retirement plan”? We also hear comments such as “I don’t know anything about investing” or, “I’m nervous about this process as I don’t fully understand it”.
Target Date, or LifeCycle funds as they are also called, can provide employees an “all-in-one” solution to the challenge of which investments to pick and how much to contribute to each one. They can simply choose the Target Date Fund as their sole selection and elect to have all future contributions go into that one fund which is allocated across a diverse set of asset classes including domestic and international equity as well as bonds.
I can recall a time in the early 2000’s when I was consulting with an employer who had 200 mutual funds available in their Retirement Plan. My colleagues and I were scratching our heads in wonder at the number of sector and sub-sector based mutual funds and other niche specialty funds available. The Plan Sponsor was attempting to appease a segment of the employee population who were more sophisticated investors, but they ended up creating a challenge for those employees who were first-time investors and did not know where to begin. This particular Plan Sponsor did not have target date funds in the plan at the time.
While it is important that your Nonprofit engage an advisor to educate your employees on the 403 B or 401 K plan. It is also important to realize that even after several educational sessions, there will be many employees who still do not have the understanding or the time to monitor their investments. Some employees will still feel overwhelmed by the decision-making process or the number of options available and so they take no action, leaving their contribution in the money market fund.
There are several benefits to Target Date Funds:
1) Set it and forget it. Since the Target Date Funds handle the asset allocation on behalf of the investor, the portfolio will automatically be rebalanced by the fund manager to the allocation target. If a particular asset class has declined, then the Target Date Fund Manager will rebalance the fund allocations back to the target and the 403 B plan participant won’t have to monitor the allocations. This is particularly important when one asset class, say emerging markets, have increased or decreased significantly and is no longer in line with the target allocations.
2) Default option. If your nonprofit hires an advisor who is a 3(38) Fiduciary, then the advisor can create an automatic default investment option in the plan. If an employee forgets to invest their contributions, the plan will be set-up to default into the Target Date Fund most closely aligned with their natural retirement age. That age is determined based on their birthdate. For example, if an employee is currently 28 years old, they would likely be aligned with the 2060 Target Date Fund since they have 39 years until they retire at 67 years old.
Target Date Funds are usually in 5 year increments like 2030, 2035, 2040, 2045, 2050, 2055, 2060 & 2065. New target date funds in a Series are typically released every 3-4 years. Plan Sponsors – don’t assume that your Third-Party Administrator will automatically add these funds when the new series is released. Your advisor should monitor your fund line-up to include newly released target date funds.
3) Portfolio Adjusts Nearing Retirement. Target Date funds have a glidepath associated with them. This means the fund allocations adjust to more a more balanced target portfolio allocation as it nears the retirement date associated with the fund. The Target Date fund will “glide” towards the target date or retirement age by reducing it’s equity investment exposure This is especially helpful for those employees who haven’t been paying much attention to their portfolios until they are closer to their retirement age. There have been a number of times I have spoken to new clients who aren’t fully aware of all their retirement accounts, the investments inside and the full balances.
So if your nonprofit is thinking about launching a retirement plan or adding to the fund line-up, you should ask your advisor about Target Date Funds and default investment options.
Talk to the financial experts at Fairlight Advisors to learn more about managing your nonprofit’s investments. Schedule a free consultation today!