What benchmark do you use for a target-year fund?

[Peter Gulia]

For ERISA-governed individual-account retirement plans that provide participant-directed investment, many such plans’ administrators furnish disclosures to follow 29 C.F.R. § 2550.404a-5.

That rule calls one to show specified comparisons of a designated investment alternative’s past-performance returns to those of “an appropriate broad-based securities market index[.]” 29 C.F.R. § 2550.404a-5(d)(1)(iii) https://www.ecfr.gov/current/title-29/part-2550/section-2550.404a-5#p-2550.404a-5(d)(1)(iii).

Although Congress in 2022 directed the Secretary of Labor to “promulgate regulations” about a benchmark one may use when an investment alternative “contains a mix of asset classes”, no such rule has been made or even proposed.

Recognizing that (at least for smaller plans) many recordkeepers and third-party administrators assemble 404a-5 disclosures with little or no guidance from a customer plan administrator, what are service providers using as the benchmark for target-year funds?

[Paul I]

The lack of explicit guidance makes this subject to individual interpretation.  Here are some approaches I have seen used where the benchmark is one of these:

• identified in each Fund Fact Sheet (readily retrieved with an online search using the fund symbol)
• published by Morningstar
• published on the mutual fund family's web site
• available from an investment analysis that a financial advisor made available

Notably for target date funds, it is not uncommon for a mutual fund to provide a benchmark that is a blend of other benchmarks (e.g., 60% S&P 500 + 40% Russell 2000).

It also is not uncommon for a mutual fund family to define its own benchmarks (which somehow happen to wind up presenting the fund performance in a better light than other published indices).

[Peter Gulia]

When it’s practically achievable, I prefer making a target-year fund’s comparator a composite of index returns, weighted to the fund’s target allocations. To make this fair, the target allocations are those previously stated in each fund’s offering documents. For each asset class, the composite names its widely recognized index.

But am I right in guessing some recordkeepers don’t do this in assembling a 404a-5 disclosure?

[Paul I]

Frankly, the vast majority of recordkeepers pick a data source (like Morningstar) and use whatever the data source provides.  Recordkeepers take the path of least resistance to assemble the disclosure just to be able to say it was done.

In today's markets, the investment information in the disclosure is ancient history by the time it is made available to the participant.  The vast majority of printed 404a-5 disclosures make the long trip from the recordkeeper's mail room to the participant's trash bin.  Any 404a-5 disclosure available online likely only gets opened by accident.

There are far better formats for communicating investment information having greater value to participants.

[Peter Gulia]

Paul I, thank you for confirming what I suspected about how a service provider might display an index without evaluating whether it is “appropriate” to the supposed comparison. (I see as rational some recordkeepers’ business decisions to do the task that way.)

I’ve seen recordkeeper-assembled 404a-5 disclosures with foolish comparisons. For example, comparing:

a global stock fund (which invests about half in US stocks) to an index of only non-US stocks;

an emerging-markets fund to a developed-markets index;

a US small-cap fund to the S&P 500 index (which is at least large-cap);

a short-term Treasuries fund to an aggregate bond index;

a US real-estate fund to a global stock index;

a US value fund to a blend index.

And some “benchmarks” I’ve seen used as a comparator for target-year funds involve no recognition of the asset allocation the fund targets.

While I see the 404a-5 disclosures as often useless noise and sometimes harmful, here’s a trap.

Even if many plans’ administrators accept without question a recordkeeper-assembled 404a-5 disclosure, a few ask for advice.

If a plan’s administrator asks its lawyer for advice about whether a suggested format for a 404a-5 disclosure meets 29 C.F.R. § 2550.404a-5(c)-(d), including 29 C.F.R. § 2550.404a-5(d)(1)(iii) about “an appropriate broad-based securities market index”, the lawyer must pretend the Labor department’s interpretive rule generally has a purpose, and that the particular condition has a purpose. How else could one give advice about whether a displayed index is an “appropriate” index?

While I do it often, it’s at least awkward to invite a plan’s fiduciary to evaluate whether the expenses of following a Labor department interpretation would be a loyal and prudent use of the retirement plan’s assets.

[Paul I]

Your scenario certainly presents a trap, and potentially and especially for the plan administrator.  Extending the scenario, assume the plan engages a financial advisor as a 3(21) or 3(38) fiduciary, and the financial advisor prepares or reviews and approves the content of the 404a-5 disclosure.  Assume further that the lawyer is asked by the plan administrator to review the appropriateness of the benchmarks in the disclosure and the lawyer's comments that the benchmarks are questionable or maybe even inappropriate.  Where does this leave the plan administrator, the financial advisor and the lawyer?

[Peter Gulia]

I have not encountered a situation in which either a § 3(38) investment manager or a § 3(21) investment adviser was involved in preparing or reviewing a 404a-5 disclosure.

Imagining your hypo, a smart lawyer might suggest her client limit the scope of the lawyer’s advice to whether, following ERISA § 404(a)(1)(B), the administrator reasonably may rely on the investment adviser’s advice, assuming the administrator would get the adviser to confirm in writing that its advice includes considering whether each comparator is “an appropriate broad-based securities market index” regarding the investment alternative for which it would be a comparator.

If the administrator loyally and prudently selected the investment adviser, that and other surrounding facts and circumstances might make it reasonable for the administrator to rely on such an adviser’s advice about the fact-related question. While a relying fiduciary must not unquestioningly accept advice, a fiduciary using no less care than a similarly situated, experienced, and prudent fiduciary would use might find no fault in the advice.

If the plan’s administrator does not limit the scope of the lawyer’s advice (and the lawyer accepts the task), a lawyer must provide her candid advice.

If a plan’s administrator sees differences in its investment adviser’s and its lawyer’s advice, the administrator should discern—with whatever further advice the administrator gets—each better-reasoned finding.

Or, with her client’s consent, a lawyer might discuss with the investment adviser its advice, and either might consider how to reevaluate and harmonize one’s advice.

This is not advice to anyone.

I suspect many of our BenefitsLink neighbors wonder why we’re thinking about situations that in their experience occur rarely, or perhaps never. In my work, it’s real.

[Paul I]

@Peter Gulia, you may have seen this recent article titles Suit Says IBM’s Custom TDF Benchmarks ‘Insufficient’

https://www.napa-net.org/news/2025/11/suit-says-ibms-custom-tdf-benchmarks-insufficient/?ite=49712&ito=1681

It will be interesting to follow its progress to see if this type of litigation spreads to other plans, or even to mutual funds companies that use DIY benchmarks.

This could be a motivation for a plan's legal counsel to provide input into a plan's investment benchmarks.

[Peter Gulia]

Paul I, thank you for this.

For BenefitsLink readers, here’s the Bakers’ post of the complaint: https://benefitslink.com/src/ctop/arechiga-v-ibm-sdny-complaint-10312025.pdf

A method I suggest for some (not all) situations is a composite of indexes, but it:

sets the weights not according to allocations of a fund’s current investments but on the fund’s previous legally effective declaration of the fund’s asset-allocation targets; and

affirmatively discloses every index (each widely recognized and used) and the weight of its asset-allocation category in the composite.

A plan’s fiduciary should get its lawyer’s advice, and should get advice from one or more investment advisers that are independent regarding the investment choices to be evaluated.

(A small plan’s fiduciary might omit one or both aspects of advice if the expense would be disproportionate to the incremental advantage that could be obtained through better informed decision-making.)

This is not advice to anyone.