Why proprietary target date funds matter in a conversion

When benchmarking a retirement plan, the biggest driver of costs tend to be the asset based fees charged by the investment managers.  As advisor’s have driven these costs down over the last five years utilizing institutional funds and collective investment trusts, recordkeepers are all trying to figure out how to make money in this low margin business.

One heavily used approach is to offer discounted or free pricing for recordkeeping if the plan sponsor agrees to convert their plan and do a target date conversion to a proprietary fund offering.  The recordkeeper knows that 80%+ of the assets will stay in these funds.  The asset management side of their business also has a much higher margin than the recordkeeping side.  Win/win right?

The answer is complex.  It could be a win/win if the advisor has benchmarked the target date funds and it was determined those were the ideal fit for the plan sponsor and their employees.  If this is the case and it is clearly documented in advance, then yes, it is probably a win/win.  BUT…what if the recordkeeper was selected first and no real review occurred of the target date funds?  This could be a problem.  You don’t have to look far for lawsuits against these asset managers when managing their own plans.  Not only that, many of these cases have been successful in getting significant settlements for their clients.  Working with an experienced consultant who knows the inner-workings of the marketplace will be the first step in solidifying and documenting that target date fund review process.