Department of Labor guidelines lay out a sponsor's main fiduciary responsibilities. First among them is an understanding of the glidepath design and construction, which is the main driver of returns in a target-date fund. Second is an understanding of risk. The third is reviewing fees and expenses. By focusing primarily on cost, which is what many sponsors do in selecting a passive target-date fund, they are letting fees and expenses essentially determine the process rather than considering all the responsibilities involved in a more complicated investment decision.
We believe it's a mistake for plan sponsors to think they are within the law's safe harbor provisions simply by choosing the low-cost provider. In a passive target-date fund, the lack of risk controls at the sub-asset class level can result in inferior risk-adjusted return and a wider variation of returns among participants and across time. Passive approaches also have significant deficiencies in terms of limiting diversification, which can produce a sub-optimal portfolio in terms of risk management. All of which can affect wealth accumulation over a participant's lifetime. What initially may appear to some to be the safe or prudent selection actually winds up being a sub-optimal choice from an investment perspective, and the most risky selection for participants and ultimately for the plan fiduciary.