COLLECTED WISDOM™ on Target-Date Funds
Target-Date funds have become popular with 401k plan sponsors, vendors and participants, but choosing the appropriate target-date fund for a plan is not easy.
This archive contains not only the most current material on the topic, but also older items that are still relevant, provide background, perspective or are germane to the topic.
If you find a broken link or an items that you feel is outdate, irrelevant or no longer appropriate, please let us know.
Retirement plan participants who invest in target-date funds contribute less to their plans than participants who don't use them, an analysis from Alight Solutions finds. This surprising actions from retirement plan TDF investors offer lessons for plan sponsors and indicate a need for more innovation in TDF design.
Source: Plansponsor.com, October 2019
Selecting a target-date solution is a fiduciary act, and plan sponsors must work through the distinctions between custom and packaged approaches in order to decide which is the better fit for participants in their own plans. However, the choice isn't necessarily black and white. Here are five principles that can raise the bar for packaged target-date solutions.
Source: Alliancebernstein.com, October 2019
Newport Group's Fiduciary Consulting practice has developed a robust methodology for evaluating and monitoring target-date funds. It is designed to be a prudent process that lives up to the rigorous demands of ERISA. This paper describes the details behind our evaluation and monitoring process, and provides an understanding of why such specialized due diligence is essential for target date strategies.
Source: Newportgroup.com, September 2019
Fee compression in target-date funds persists unabated as assets in target-date funds continue to grow at a rapid clip and remain concentrated in a handful of asset managers. Increased fee sensitivity compels target-date asset managers and retirement plan consultants to consider new options for product development.
Source: Cerulli.com, September 2019
Target-date funds may be the go-to allocation for most 401k sponsors and participants, but there's one area they can't seem to figure out—fee compression. It's an ongoing, and increasing, problem fueled by a concentration of assets in a handful of managers and a rapid rise in inflows.
Source: 401kspecialistmag.com, September 2019
Target-date funds are designed to simplify investing for participants in defined-contribution plans, especially in plans that use them as the default investment. However, participants sometimes combine target-date funds with other investment-plan options, thus becoming what's known as mixed target-date fund investors. While combining target-date funds with other investments may not seem problematic at first glance, it can diminish -- or even eliminate -- the target-date fund's potential benefit.
Source: Morningstar.com, September 2019
Another set of plaintiffs have filed suit about the target-date fund choices on their former employer's investment menu. The suit, filed in the U.S. District Court for the Middle District of Tennessee, was brought by Becky Kirk, Perry Ayoob and Dawn Karzenoski on behalf of the CHS/Community Health Systems, Inc. Retirement Savings Plan, which, as of Dec. 31, 2017, had $3.2 billion in assets and about 112,700 active participants.
Source: Napa-net.org, August 2019
As it awaits the results of a Supreme Court appeal on another case scrutinizing its investment decisions, Intel Corporation now faces an additional lawsuit questioning the fees and performance of custom target-date funds offered to its defined contribution retirement plan participants.
Source: Planadviser.com, August 2019
A group of current and former participants in the Walgreen Profit-Sharing Retirement Plan, individually and as representatives of a class of participants and beneficiaries of the plan, have filed a lawsuit on behalf of the plan for breach of fiduciary duties under ERISA. Despite a market "teeming with better-performing alternatives," the plaintiffs say, Walgreen selected the Northern Trust Funds, which already had a history of poor performance.
Source: Planadviser.com, August 2019
Walgreen Co. has been hit with a lawsuit alleging its "imprudent" decision to keep certain target-date funds in its 401k plan caused employees to lose $300 million in cumulative retirement savings. Plaintiffs claim the Northern Trust funds led to a "swift and devastating blow" to participants' retirement savings.
Source: Investmentnews.com (registration may be required), August 2019
Target-date funds may be the ticking time bomb of ERISA litigation. If fiduciaries have any doubt that these funds are in the crosshairs, they should take a look at the website of litigation firm Cohen Milstein, which has a whole section titled "Investigation of Target-Date Fund Investments." Cohen Milstein says it is looking at four factors.
Source: Cohenbuckmann.com, August 2019
Though some target-date managers are seeing net outflows from their mutual fund-based products, they are counting on their collective investment trust-based target-date businesses to pick up the slack. The target-date managers are capitalizing on growing interest among plan sponsors for CITs, which boast lower costs, greater flexibility and fewer regulatory/administrative requirements.
Source: Pionline.com, August 2019
The economic consequence of different defaults in defined contribution plans is significant, according to a new report by the TIAA Institute. TIAA finds that participants who joined plans post target-date defaults tend to have a greater percentage allocation to equity. And because so many allocate to the same type of fund, there is less cross-sectional variation in equity percentage for this group, according to the report. By contrast, those who joined under a money market default tended to customize their portfolios and there is a substantial cross-sectional variation in the equity percentage of their allocations.
Source: Napa-net.org, June 2019
Defined contribution retirement plans are the primary retirement savings vehicle for most American workers, and many of these plans now use target-date funds as their default investments. Previously, money market funds were the most common default. Retirement plans today also tend to offer more investment options than were available in the past. This study examines how these changes have affected plan participants' contribution allocations and equity exposure, based on a 2012 cross section of more than 600,000 TIAA participants.
Source: Tiaainstitute.org, June 2019
Passively managed target-date funds are sucking the life force from their actively managed counterparts. The money flowing into passive TDFs -- those that invest primarily in funds that track a broad market index like the S&P 500 -- has increased dramatically over the past few years as cost-conscious investors and 401k plan sponsors have sought out lower fees.
Source: Investmentnews.com (registration may be required), May 2019
Target-date strategies often serve as the default investment option in many Americans' defined-contribution retirement plans. The persistent growth and massive amount of assets mean that target-date strategies are playing a key role in helping meet the retirement goals of more and more investors. This article covers how investor demand for target-date strategies is evolving and how target-date providers have responded.
Source: Morningstar.com, May 2019
While the QDIA regulation provides a "safe harbor" that protects fiduciaries from liability for their decisions, it only applies if they comply with all the requirements of the regulation which requires prudently selecting and monitoring the investment used as the QDIA. Here are four indications it's time to thoroughly review your plan's TDF used as the QDIA.
Source: Greenspringadvisors.com, April 2019
For all their convenience, for all their popularity, the increased reliance on TDFs does not necessarily shield the 401k plan sponsor. The author spoke to corporate retirement plan advisers from across the country. They identified five ways TDFs expose plan sponsors to fiduciary liability.
Source: Fiduciarynews.com, March 2019
This 9-page summary report highlights some of the key findings from DCIIA's custom TDF research initiative, the retirement industry's first asset allocation analysis of custom target-date strategies. The report is primarily intended to aid plan sponsors and asset allocators during custom glide path discussions.
Source: Cdn.ymaws.com, March 2019
Historically, investment managers offered TDFs with traditional investment styles that were invested in their own underlying investment funds. Recordkeeper's proprietary target-date funds were also heavily utilized. As the adoption and popularity of target-date funds continues to expand, so have the diversity of TDF offerings. Today, plan sponsors can select from a universe of options to best fit their participant population. This new world of target-date funds has resulted in the emergence of new trends.
Source: Cammackretirement.com, March 2019
Target-date funds are the fastest growing segment on the 401k investment menu. In the more than ten years since they've become a QDIO staple in 401k plans, target-date funds have certainly changed the retirement prospects for employees. How have these investment vehicles changed the roles, responsibilities, and even the fiduciary liability of the plan sponsor?
Source: Fiduciarynews.com, March 2019
In 2018, 59% of Vanguard participants in defined contribution plans were invested in a professionally managed account option, including 52% who were invested in a single target-date fund. Use of TDFs in DC plans continued to grow. At year-end 2018, 9 in 10 plans offered a TDF, three-quarters of all participants had a position in the funds, and the funds accounted for 35% of plans' assets and more than half of total plan contributions. This is an 8-page report.
Source: Vanguard.com, March 2019
If you find retirement planning daunting, a target-date fund purports to offer relief. They're designed to provide a "set it and forget it" investment solution for individuals with a long-term savings goal, like retirement. While target-date funds have certain benefits, their cookie-cutter approach also has its drawbacks. Here's a look at the pros and cons of target-date funds and how to choose one that's right for you.
Source: Fool.com, February 2019
Investors saving for retirement must consider a range of factors, including the objectives they wish to achieve and the risks they are willing to take. One factor that often receives significant attention is sequence-of-returns (SoR) risk, the concern that portfolio losses around retirement could impact the ability to support postretirement income needs.
Source: Troweprice.com, January 2019
The fourth quarter of 2018 brought the markets well beyond correction territory and to the precipice of a bear market. For the first time since the 2008/2009 market crash, we've had the opportunity to glimpse at whether the various "fixes" to target-date funds following that debacle have created a more durable vehicle. While the jury may still be out, we may have stumbled upon one unexpected benefit to target-date funds (and default investments in general).
Source: Fiduciarynews.com, January 2019
Besides the differences in glide path determination, TDFs will vary in their investment strategies and fees. There are no guidelines or requirements as to how TDFs must structure their investments or glide paths. Plan fiduciaries need to establish a prudent process for selecting and monitoring a TDF. This article reviews a few things to consider.
Source: Consultrms.com, January 2019
An ongoing study of how real-life participant saving patterns interact with target-date design continues to show that suboptimal participant behaviors and the consequent increase in cash flow volatility remain much more prevalent than many plan sponsors might expect. This series of three articles discusses findings and the steps plan sponsors can take to place participants on a path to a more secure retirement.
Source: Jpmorgan.com, December 2018
The fundamental, underlying problem with most target-date funds, then, is that they focus primarily on the savings phase of retirement planning while ignoring the spending phase. This is reinforced by most target-date fund evaluators because they focus on one-, three-, five-, or 10-year performance and risk (standard deviation). That is, they evaluate target-date funds only in terms of how they treat accumulation, not how they handle both accumulation and decumulation.
Source: Morningstar.com, December 2018
LifePath, the industry's first target-date fund, prepares to mark its 25th anniversary in 2018, creating the perfect opportunity to step back and consider the growth and future of target-date funds.
Source: Blackrock.com, November 2018
This article explains why advisors to retirement plans may wish to consider offering a series of target-date retirement income funds and provides an update about a development.
Source: Morningstar.com, November 2018
In a recent survey of nearly 500 consultants, sponsors, and retirement plan advisors, the majority now prefers open-architecture, or multimanager, target-date funds. This portends a significant shift in plan design, given that less than a third of target-date funds employ an open-architecture approach today. Performance is the driving factor.
Source: Jhinvestments.com, October 2018
Whether there are target-date funds in your defined contribution plan lineup or you're considering adding them, evaluation and review are critical to your due diligence process as a plan fiduciary. This guide is focused on the practical steps to take during the evaluation process, which may include comparison and selection of TDFs, understanding their underlying investments, reviewing fees, developing communications, and documenting the process.
Source: Vanguard.com, October 2018
The underlying investments in DC plans need to evolve to improve retirement income outcomes for participants. The strategic use of alternative assets in a TDF structure, or a diversified TDF, demonstrates that including these asset classes can improve expected retirement income and mitigate loss in downside scenarios.
Source: Georgetown.edu, October 2018
One of the most popular investment strategies employed in US retirement accounts is ill-suited for the job, according to research on retirement outcomes. These strategies are known as target-date funds. Academics suggest such products may struggle to deliver a consistent stream of income for retirees.
Source: Ft.com, September 2018
Younger 401k plan participants have large allocations to target-date and other types of balanced funds, according to a new joint study released today by the Investment Company Institute and the Employee Benefit Research Institute. At year-end 2016, 64 percent of 401k participants in their twenties held target-date funds, compared with 45 percent of 401k participants in their sixties.
Source: Ebri.org, September 2018
As more plans adopt qualified default investment alternatives for their set-it-and-forget-it participants, target-date funds have grown to nearly $2 trillion in assets. Now that the problem of getting people enrolled in a retirement plan has been addressed, it is time to tackle how investments in these plans are chosen to make sure there is a focus on long-term outcomes and performance.
Source: Benefitnews.com, August 2018
Among the biggest DC trends is the use of target-date funds to grow retirement wealth. According to a recent Vanguard report, nine in 10 defined contribution plan sponsors offered target-date funds as an investment option at the end of 2017. If your retirement plan currently includes target-date funds or you're considering them, it's important to balance their pros and cons.
Source: Investopedia.com, August 2018
It isn't hard to find a plan that has invested in target-date funds. But it can be hard to find assessments that ask hard questions about them. A recent white paper fills that void and asks whether TDFs are the panacea some may think.
Source: Asppa-net.org, July 2018
Defined contribution money managers reported a large jump in target-date assets under management to $1.44 trillion as of Dec. 31, up 30.5% from the end of 2016, according to Pensions & Investments' annual survey. Consultants cited target-date strategies' prominence as default investment options, the increased use of auto features, and positive market returns in 2017 as contributors to those funds' growth.
Source: Pionline.com, July 2018
Target-date funds built by firms with large networks of 401k plan advisers are beginning to gather significant assets, posing a direct threat to some asset managers trying to distribute their own products.
Source: Investmentnews.com (registration may be required), July 2018
For plan sponsors, the tremendous growth in assets, changing market conditions and balancing the needs of younger and older participants complicates selection and monitoring of target-date funds. Advisors can help by bringing plan demographics to the discussion and looking at the distribution of ages and account balances of a plan population.
Source: Americancenturyblog.com, June 2018
This article describes the benchmarks that are currently available and offers some guidance on selecting the appropriate benchmark. Fiduciaries should align the objectives of their TDF with those of the benchmark, and confirm that the benchmark glide path and underlying allocations are in line with the TDF that is being evaluated.
Source: Targetdatesolutions.com, June 2018
Economist Laurence Kotlikoff points out that economic theory does not support TDFs' age-based thesis. He cites two separate studies that independently concluded that we should hold the same portfolios as we age. In other words, our investment decisions should be the same when we're 30 as when we're 90. This article reviews why.
Source: 401ktv.com, June 2018
The data are in, and they tell a powerful story about the state of retirement in America. The 17th edition of How America Saves delves into the retirement savings behavior of 4.6 million participants in defined contribution (DC) retirement plans for which Vanguard provides recordkeeping services. Our data-rich report examines trends in how participants accumulate, manage, and access retirement savings.
Source: Vanguard.com, June 2018
Target-date funds differ significantly in terms of asset classes, glide path, fulfillment, and fees. It is a rich variety to choose from and at the same time may add to one's perplexity. So, how do plan sponsors evaluate a TDF series?
Source: 401kspecialistmag.com, May 2018
Target-date funds hit a momentous mark in 2017 by eclipsing $1 trillion in assets.The funds' unimpeded growth means target-date funds play an increasingly important role in retirement success for more and more investors. Morningstar's recently released annual report covers recent developments in the competitive landscape. Here's a summary of target-date fund landscape in just five charts.
Source: Morningstar.com, May 2018
The use of passive target-date funds in DC plans continues to grow, in part due to their low-cost relative to other TDF options. While the cost advantages of these TDFs can be attractive, cost represents only one of the factors that plan sponsors and their advisors should consider when selecting a TDF on behalf of participants. This 11-page paper highlights three common myths about passive TDFs to help plan sponsors dig deeper in their due diligence and ensure they follow a prudent selection process based firmly on their specific plan needs.
Source: Schwabfunds.com, April 2018
Beyond the obvious benefit of having a professional manager and rebalance portfolios, the HR manager believes that target-date strategies relieve employee stress and burden of having to select and manage funds themselves.
Source: 401ktv.com, April 2018
In its discussions with TDF managers, Mercer has found many managers say they have not aligned with the ACWI, and have continued with portfolios that display home equity bias for a number of reasons; the research also shows strong growth in passive TDF market share.
Source: Planadviser.com, April 2018
Mercer is out with topical info on target-date products, reminding all involved that the fact that so many participants simply default into TDFs does increase the importance of the plan sponsor's selection of the TDF provider.
Source: 401kspecialistmag.com, April 2018
Client money has continued to flow out of the Fidelity's Freedom Funds as retirement plan sponsors shift workers' savings to rivals in the target-date fund business. The exodus stems in part from unease with the way Fidelity has boosted performance, by ramping up risk. Since a strategy overhaul that took full effect in 2014, Fidelity has substantially increased exposure to stocks, including those from volatile emerging markets. The firm also scrapped a long-held belief of sticking to pre-set allocations of stocks, bonds and other assets in target-date funds.
Source: Reuters.com, March 2018
This article addresses three major features common to most TDF's structure: asset allocation, management style, and fees. If not evaluated carefully -- on a manager-by-manager basis -- could result in a mismatch between an employer's goals and participant investment results.
Source: Psolve.us, February 2018
About a third of participants across Millennials, Generation X, and Baby Boomers who self-manage the investment of their plan accounts are more conservative than a typical target-date fund appropriate to their age.
Source: Plansponsor.com, January 2018
The proliferation of target-date fund varieties can confuse many plan sponsors. One survey found that while nearly two-thirds of plan sponsors consider investment performance the most important selection criterion when choosing a TDF for their participants, more than half are not confident that they have a solid basis for benchmarking the TDFs against other similar funds in the marketplace.
Source: Orbablog.com, January 2018
Vanguard plan participants reached a critical tipping point. Half of all Vanguard participants are invested in a single target-date fund. And 57% of all participants were solely invested in a professionally managed allocation: 4% were using managed account options, 3% held a single-risk-based balanced fund, and 50% held one TDF.
Source: Vanguardinstitutionalblog.com, November 2017
Competition for target-date funds in the DC market is showing no sign of abating. DC Specialists are looking outside the two-dominant target-date fund providers. While American Funds and Vanguard continue to square off for the greatest proportion of target-date fund dollars among this elite plan advisor segment, three investment managers are gaining ground.
Source: Marketstrategies.com, November 2017
Despite the challenging barriers to entering a concentrated market, a new study points to open-architecture series as a way for target-date fund managers to benefit from increased demand for their products.
Source: Napa-net.org, November 2017
The 2017 TDF Buyer's Guide represents $1.6 trillion in assets as of June 30. Of the target-date fund market reported, 60% of products are in mutual funds, 37% in collective investment trusts, and 3% in variable portfolios. The analysis is based on the 71 off-the-shelf, or prepackaged, products and custom solutions are excluded.
Source: Planadviser.com, November 2017
Research shows that the majority of assets in DC plans today are invested in the QDIA, and most of those assets are invested in target-date funds. In speaking with top advisor teams in the industry, PIMCO learned that many would benefit from more guidance on how to establish and conduct an ongoing TDF monitoring process.
Source: Chaoco.com, October 2017
It is important that plan sponsors understand that choosing a passive target-date option is far more complicated than opting for a passive option in a straightforward, single-style strategy. This 4-page paper highlights the key issues surrounding passive target-date funds, including how they differ from active strategies and how to differentiate between passive offerings.
Source: Fiallc.com, September 2017
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