Defined Contribution Plans and Target Date Funds
As 2014 comes to a close, it’s a great time to review your company’s defined contribution plan investment results to evaluate whether or not it’s meeting your employees’ needs.
Target date funds are a popular investment option which are structured to address a future date, typically retirement. Participants select their target date and the fund managers rebalance the fund assets each year to meet the fund goals. Typically, fund volatility decreases as the selected fund date approaches.
The Internal Revenue Service (IRS) recently released guidance (October 2014) to clarify target date fund options that are restricted to a particular age group including deferred annuities. The IRS guidance was in response to concerns that target date funds favor participants who are closer to retirement. The IRS stated that target date funds do not violate nondiscrimination requirements by offering target date funds that are restricted to particular age groups as long as:
• Target date funds are offered as a single integrated investment program.
• If deferred annuities are offered, they do not offer guaranteed lifetime withdrawal benefit or guaranteed minimum withdrawal benefit.
• Funds do not hold employer securities and are created in a manner consistent with other funds.
Target date funds are popular investment options because employee account balances are invested in risk reflective of their age and time until retirement. The recent IRS ruling allows for employers to offer the funds in their plan, without worrying about violating nondiscrimination rules.
Still curious to learn more about 401(k) plans? Our team at Delap is happy to answer any questions regarding this concept, or any other accounting and finance challenges you may be facing.
Reach out today!
Delap LLP is one of Portland’s largest local tax, audit, and consulting accounting firms, located in Lake Oswego, Oregon.