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.
Younger 401k Participants Turning to Target-Date Funds - Summary: A growing number of recently hired participants in 401k retirement plans -- particularly those in their 20s -- are investing in target-date funds (TDFs), according to an analysis by the nonpartisan Employee Benefit Research Institute.
Source: Employee Benefit Research Institute
, February 2012.
Target-Date Funds Get Customized - Summary: Custom target-date funds are beginning to proliferate at the expense of their off-the-shelf counterparts. That's due to plan sponsors wanting to have greater control over what's in a fund and have access to a wider array of investments to put in them.
Source: Financial-planning.com, January 2012.
Benchmarking Target-Date Funds: Two Simple Choices for Fiduciaries - Summary: Much debate and controversy surround the benchmarking of target-date funds (TDFs). The challenge revolves around the fact that the asset allocation, and therefore risk, of TDFs changes through time. But if fiduciaries will take a step back to look at the big picture, there are really only two choices: Procedural Prudence or Substantive Prudence.
Source: Targetdatesolutions.com , December 2011.
Improving Retirement Success by Managing the "Target-Date" - Summary: While it is impossible to force a participant to retire later, much like it is impossible to guarantee the long-term return of any portfolio, creating reasonable expectations about the optimal retirement starting date can significantly improve the probability of retirement success for a retiree.
Source: Unified Trust , December 2011.
Target-Date Funds: On the Mark After All? - Summary: Target-Date Funds aren't just getting bigger, they also seem to be getting better. An analysis by Morningstar in August found that losses during the summer market meltdown were far less severe for 2010 and 2015 TDF series than losses were for those funds in 2008.
Source: Registeredrep.com, November 2011.
Survey Reveals Plan Sponsors May Have a False Sense of Security With Target-Date Funds - Summary: A just-released survey by Janus found that DC plan sponsors are professing a higher level of confidence in their target-date fund knowledge and offerings compared to a year ago. In contrast to that sentiment, however, the data also revealed contradictory responses and the existence of a significant percentage of sponsors seemingly unaware or unconcerned about areas that could present real fiduciary risk.
Source: 401khelpcenter.com, November 2011.
Target-Date Funds: Plan Sponsor Considerations - Summary: Some of the issues addressed in the article: 1) Growth in TDFs, especially in retirement plans, can in part be attributed to the qualified default investment alternatives (QDIAs) regulations released in 2006 and 2007; 2) More on the "To versus Through" difference between funds; and, 3) Some considerations for sponsors as they include TDFs in their plans: required disclosures, communications, and ongoing benchmarking.
Source: Milliman , October 2011.
Target-Date Fund Use in 401k Plans and the Persistence of Their Use - Summary: This study examines the use of target-date funds (TDFs) by a consistent group of 401k participants in plans that offered them in 2007 through 2009. The consistent group of participants were those who were in a plan that offered a TDF in 2007, were in plans that were still offering TDFs in 2008 and 2009, and were still in the data source in 2008 and 2009.
Source: Employee Benefit Research Institute , August 2011.
Target-Date Funds: Are They Hitting the Target - Summary: Are target-date funds accomplishing their goal of providing long-term investment allocations that will provide growth, preservation of capital, and, finally, a secure nest egg for participants? This white paper reviews their progress, discuss the changes they have undergone, and ultimately ask the question, "Are they hitting the target?"
Source: Arnerich Massena , July 2011.
Managers Shift Thinking on Target-Date Fund Management Approach - Summary: In Callan's 2011 Target-Date Fund Survey: The Evolving Target-Date Fund, it is clear that target-date funds (TDFs) continue to evolve as managers evaluate their glidepaths and the use of underlying funds. In March 2011, Callan surveyed 26 target-date fund managers representing $375 billion and 35 unique target-date series to get their take on management approaches, glidepath design and anticipated changes.
Source: 401khelpcenter.com, July 2011.
Re-thinking Target Date Funds: No Magic Formula - Summary: Is the conceptual design behind Target Date Funds sufficiently robust to warrant the claim of being "the" ideal solution for defined contribution retirement plans? This article aims to make the case for a complete and consistent framework to vet the risk-and-return proposition of TDFs. In particular, financial operators and regulators should re-examine the existing TDF solutions and encourage more accurate disclosure of the expected risks and returns of each product in a manner consistent with (a) rigorous analysis based on commonly accepted financial theory and (b) realistic empirical market evidence.
Source: Buck Consultants , June 2011.
A Brief History of Target-Date Funds - Summary: The genius behind the creation of the first target-date funds was the realization that participants could be aggregated into manageable cohorts, organized by years to liquidity (retirement), and that single piece of information was more powerful than all the other factors under consideration in portfolio construction. The goal was simply to provide a coherent strategy that would suit most investors in the retirement plan from the first day of their participation until they were ready to retire.
Source: Target Date Analytics , March 2011.
Are Target-Date Funds a Bad Idea? - Summary: The most common complaint about TDFs is generally expressed as follows, "No fund based solely on years-to-retirement can be the best investment strategy for every participant with the same number of years to retirement." This article is written to give needed perspective to this issue.
Source: Target Date Analytics , March 2011.
Target-Date Fund Adoption in 2010 - Summary: Use of target-date funds in defined contribution (DC) plans continues to grow rapidly, particularly as a qualified default investment alternative. At year-end 2010, 79% of plans offered a target-date fund and 48% of participants used them when offered. Twenty percent of all Vanguard participants are invested in a single target-date fund.
Source: Vanguard , March 2011.
GAO Report to Congress on Target-Date Funds - Summary: Because of recent concerns about significant losses in and differences in the performance of some TDFs, GAO was asked address the following questions: (1) To what extent do the investment compositions of TDFs vary; (2) what is known about the performance of TDFs; (3) how do plan sponsors select and monitor TDFs that are chosen as the plan's default investment, and what steps do they take to communicate information on these funds to their participants; and (4) what steps have DOL and the SEC taken to ensure that plan sponsors appropriately select and use TDFs? This is their report on the questions.
Source: U.S. Government Accountability Office , February 2011.
ASPPA Comments on Proposed QDIA Amendments - Summary: ASPPA filed these comments with Department of Labor with respect to its proposed amendments to the qualified default investment alternative and the participant-level disclosure regulations for target-date funds.
Source: ASPPA , January 2011.
ERIC Urges Balance on Proposed Target-Date Fund and QDIA Disclosure Requirements - Summary: The ERISA Industry Committee today submitted comments to the Department of Labor's Employee Benefits Security Administration on proposed regulations concerning disclosure requirements for qualified default investment alternatives (QDIAs) and target-date funds (TDFs).
Source: 401khelpcenter.com, January 2011.
Prudent Fiduciary Selection and Monitoring of Target-Date Funds - Summary: This paper provides a practical fiduciary approach to analyzing target-date funds by suggesting that plan fiduciaries focus on four specific areas: risk; risk-adjusted returns and expenses; underlying funds; and reliability. It also includes a target-date fund perspective by the IFLC stating their significant concern with this fund.
Source: Investment Fiduciary Leadership Council , August 2010.
Target-Date Funds Questioned - Summary: New academic research finds that managers of target-date funds tend to invest in their own family of funds, which can result in higher fees and lower performance. What can HR do to ensure its workers who use such funds are properly saving for their retirement?
Source: HREonline.com, August 2010.
Does a Custom Target-Date Fund Really Add Value? - Summary: As target-date funds continue their growth in adoption by defined contribution plans, so too grows the debate surrounding them. One commonly held belief is that a custom-built series of target-date funds is inherently superior to the proprietary strategies that are more widely available. In this article, two Vanguard experts consider this belief.
Source: Vanguard, August 2010.
SEC and DOL Guidance on Target-Date Funds - Summary: Target-date funds are the subject of great scrutiny. The DOL and SEC have issued two pieces of guidance to correct the perceived deficiencies. This four page article discusses this guidance.
Source: Drinker Biddle & Reath LLP, July 2010.
Target-Date Funds and Retirement Savings - Summary: A study by Deloitte Financial Advisory Services LLP in conjunction with Advanced Analytical Consulting Group for the Department of Labor. This study focuses on the effects of target-date funds, as compared to other investments, on the accumulation of DC pension benefits.
Source: U.S. Department of Labor , June 2010.
SEC Proposes New Advertising Disclosure Requirements for Target-Date Funds - Summary: The SEC has proposed new advertising and sales literature disclosure requirements for target-date funds. These proposed disclosure requirements are a reaction to concerns relating to shareholder understanding of the risks associated with, and the differences among, target-date funds.
Source: Paul, Hastings, Janofsky & Walker LLP , June 2010.
The Target-Date Duty - Summary: Target-date funds have enjoyed remarkable acceptance by 401k fiduciaries, and why not? They “solve” the problem of lack of investment knowledge of many participants—and they are eligible for the QDIA fiduciary safe harbor for defaulted participants. However, that acceptance may have been too fast.
Source: Drinker Biddle & Reath LLP, June 2010.
Voluntary Enrollment Spurs Target-Date Funds' Surging Popularity - Summary: According to Target-date fund adoption in 2009, a new research note from the Vanguard Center for Retirement Research, target-date funds were offered by 75% of Vanguard-recordkept defined contribution plans in 2009. This is a remarkable increase from just five years earlier. In 2004, only 13% of our DC plans offered target-date funds.
Source: Vanguard, May 2010.
Investor Bulletin: Target-Date Retirement Funds - Summary: Because target-date funds are often available through 401k plans, the U.S. Department of Labor is providing this simplified discussion of target-date retirement funds for purposes of general information.
Source: U.S. Department of Labor , May 2010.
The Hidden Risk in Target-Date Funds - Summary: Choosing the appropriate target-date fund for a plan is not easy, given the large number of products in the marketplace and the lack of tools to easily compare those offerings. That choice, however, is made a lot easier if one focuses on the component of TDFs where investors are exposed to the greatest risk – the "risk zone."
Source: Target Date Solutions , April 2010.
Consultants Report Growth in Custom Target-Date Strategies - Summary: Investment consultants say custom target-date strategies are growing in prevalence as options in defined contribution retirement plans, such as 401ks, according to the 4th Annual Defined Contribution Consulting Support and Trends Survey released by PIMCO.
Source: 401khelpcenter.com, April 2010.
Target-Date Fund Investing: Shattering the Myths - Summary: Target-date funds (TDFs) continue to be the subject of intense discussion, especially in the aftermath of the market crisis of 2008–2009. While TDFs have solidified their position as a centerpiece of the defined contribution plan, the debate rages on. This paper provides insight into TDF usage, design, and effectiveness.
Source: Vanguard , April 2010.
What Is the End Game With Target-Date Funds; Retirement or Death? - Summary: An article recently published in a retirement plan industry journal addressed criticisms of the construction of Target-Date Retirement portfolios that are based on a "through" retirement approach. The term "through" retirement implies that the glide-path, the formula by which the portfolio's asset allocation rebalances over time, carries through retirement to death. This strategy is contrasted by the "to" retirement approach, in which the glide-path is designed to end, or become static, at retirement, as opposed to death. Which is right, retirement or death?
Source: 401khelpcenter.com, April 2010.
Items for Plan Fiduciaries to Consider When Selecting and Monitoring Target-Date Funds - Summary: The American Benefits Council and the Investment Company Institute have identified a number of items that fiduciaries of defined contribution retirement plans may want to consider when selecting and monitoring target-date funds. They are outlined in this letter to the Employee Benefits Security Administration.
Source: American Benefits Council , April 2010.
Target-Date Funds: A Wonder Drug for Participants or a Pandora's Box for All Concerned - Summary: The purpose of this paper is to demonstrate why it is in the best interest of 401k sponsors, participants, and the fiduciaries to carefully reexamine their processes for choosing and then monitoring the behavior and use of target-date funds (or any other QDIA and/or advice provider).
Source: Investment Horizons , March 2010.
Target-Date CTFs Taking Hold in the DC Market - Summary: According to Cerulli's latest retirement-focused research, collective trust funds (CTFs) are experiencing a renewed interest over the last few years in the defined contribution landscape.
Source: Plansponsor.com, March 2010.
Target-Date Series Research Paper: 2010 Industry Survey - Summary: The survey documents trends in target-date fund design, costs, and asset flows since the 2008 market downturn as well as target-date strengths, weaknesses, and returns to investors. It also offers an examination of target-date fund disclosure, and an analysis of the performance of fund series using proprietary, or in-house, versus independent managers in target-date fund construction.
Source: Morningstar , March 2010.
Evaluating Whether Your Target-Date Fund Measures Up - Summary: As the Labor Department signals its interest in weighing in on these funds, plan sponsors should make sure their evaluation process is in place, and that it's thorough and well-documented.
Source: Callan Associates , February 2010.
Target-Date Funds - The Next Wave of Litigation? - Summary: The author discusses three issues around target-date funds and suggests that plan sponsors do their homework, understand what they are getting, and then make a prudent decision as to what is best for their participants.
Source: 401khelpcenter.com, February 2010.
DOL Issues Ruling on Target-Date and Lifecycle Mutual Funds - Summary: Although the DOL affirmed the current state of the law in its recent advisory opinion, regulatory and legislative initiatives affecting target-date funds and their use in retirement plans remain under discussion, and have been the subject of additional Congressional hearings. In addition, guidance for benefit plan fiduciaries on the selection and use of target-date funds is expected to be published by the DOL.
Source: Dechert LLP , December 2009.
DOL Advisory Opinion 2009-04A - Summary: Issue: Whether target-date or lifecycle mutual funds constitute "plan assets" of investing employee benefit plans or whether the investment advisers to such mutual funds are fiduciaries to the investing plans under ERISA.
Source: U.S. Department of Labor, December 2009.
Target-Date Fund Users Apparently Don't Understand Their Purpose - Summary: Some investors in target-date funds apparently do not understand the purpose of the funds and could end up with a potentially inferior portfolio in terms of risk/return tradeoff, according to a study published today by the nonpartisan Employee Benefit Research Institute.
Source: 401khelpcenter.com, December 2009.
COMMENTARY: Target-Date Funds: What About Risk? - Summary: Pre-diversified portfolios, like target-date funds, have risk management as their reason for being. If investors were capable of building and maintaining a customized portfolio themselves or had access to professional advice to help them, target-date funds might not be necessary. But keep in mind that these funds are primarily designed for investors who are either unable or unwilling to structure an appropriately designed portfolio for themselves.
Source: fi360 Blog, November 2009.
Target-Date Retirement Funds: The New Defined Contribution Battleground - Summary: Defined contribution schemes already are driving the innovations required for a second generation of target-date funds, one that addresses some of the faults revealed by the bear market. Plan sponsors are leading this product development, which not only will favor entirely new types of vendors, but also will reshape the defined contribution marketplace. This 24 page white paper reviews First Generation Target-Date Funds, Next Generation Target-Date Funds, and Winning Business in the New Target-Date Market.
Source: Casey, Quirk & Associates , November 2009.
Target-Date Funds Survey - Summary: This is the published reults of a recent survey conducted be PSCA on target-date funds. PSCA received 397 responses from plan sponsors. 54.8 percent of responding companies have more than 1,000 participants.
Source: Profit Sharing/401k Council of America , November 2009.
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