You could liken the explosive target-date fundmovement to that of Star Trek's tribbles. Not only does everyoneseem to adore TDFs, but they may very well consume the 401(k) planindustry. But are TDFs really the “right” thing to do? (Photo:Shutterstock)

In “The Trouble with Tribbles,” one of the most popular StarTrek episodes, Captain Kirk had a perplexing challenge: He neededto solve the problem of the tribble. Tribbles were a guineapig-like ball of fur that everyone loved, and that seemed tomultiply exponentially – to the point where they nearlyoverwhelmed the ship.

It's not hard to imagine likening the explosive target-date fund movement to that of StarTrek's tribbles. Not only does everyone seem to adore TDFs, but they may very well consume the401(k) plan industry. But are TDFs really the “right” thing todo?

Behavioral psychologist Robert Cialdini, in his bookInfluence: Science and Practice, states “one means we useto determine what is correct is to find out what other people thinkis correct.” He warns, however, that his decision-making shortcutcarries with it the stern warning every parent has issued to everychild: “If all your friends jumped in the lake….” Indeed, withTDFs, it's a false comfort to believe there is safety in numbers(see “5 Areas Where Target Date Funds Increase 401k PlanSponsors' Fiduciary Liability,” FiduciaryNews.com, March 26,2019).

In a sense, the mechanism driving TDF growth is no differentthan any other investment mania. The good news, though, is that,unlike tulips, beanie babies, and cryptocurrency, TDFs actuallyoffer some measurable good.

For one thing, their seeming simplicity, though a canard,encourages people to behave in a manner that captures their bestinterest. It's not the nature of the investment but the nature ofthe role that investment plays in boosting retirement savings.

TDFs accomplish this in two ways. First, as one of the three“safe harbor” QDIAs, TDFs present plan sponsors with theopportunity to adopt open enrollment policies within their plans.As more plans have adopted these opt-out provisions, we've seengreater 401(k) plan participation.

Second, beyond automatic enrollment, TDFs have made it easierfor employees to understand their retirement investments. Fordecades, understanding their investments represented a constantstruggle for the 401(k) participant. Reams of materials attemptingto explain Modern Portfolio Theory to the masses only furtherexasperated employees.

Over the past fifteen years or so, we've witnessed a dramaticshift in the objective of employee education. No more do we see anemphasis on pie charts and asset allocation models. Now we areseeing increased attention paid to savings strategies and thisconcept called “retirement readiness.”

As Cialdini alludes to, as more of their peers take advantage oftheir company's 401(k), there's less resistance in contributing totheir retirement plan. We can thank the omnipresent TDF for thistrend. It's been a movement that has greatly increased retirementsaving.

Of course, that's not to say TDFs don't have a down side. Thesame social phenomenon that has pushed employees towards greaterretirement savings has, albeit in a different way, similarly urgedplan sponsors down the same path.

This is where things get dicey. It's one thing for employees tofollow the crowd and save more. It's quite another for plansponsors to join the stampede merely because that's what the herdhas decided.

In that sense, plan sponsors cannot adopt the mindset of thelemming. Simply selecting a TDF does not absolve the plan sponsor'sfiduciary duty.

As with the selection and monitoring of any plan investmentoption, plan sponsors must adhere to a strict adherence to adiligent process regarding TDFs. They can't merely follow thecrowd.

In fact, there may be wisdom if they take, at least as aninitial approach, the advice of Yogi Berra: “Nobody goes thereanymore. It's too busy.”

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