Defined Contribution Investment Perspectives
Given the rapid acceptance of target date funds (TDFs) as the primary retirement investment strategy for American workers, the choice of target date provider is now among the most important decisions for an investment committee.
The beauty of a TDF is its simplicity for participants. However, its underlying complexity can challenge committees tasked with assessing a TDF’s glide path design, risk/return profile and fee structure as part of fiduciary due diligence.
One of the considerations is whether the TDF should be actively or passively managed. In either case, appropriate due diligence must be conducted. When selecting a TDF provider, sponsors should remember:
Fiduciaries sometimes view passive strategies as “safer” choices out of concern over fees. Fees are an important consideration in the selection of a TDF provider, but not the only one. What ultimately matters are economic outcomes for participants.
As such, fiduciaries should analyze how a target date series is structured to deliver the best value for participants. Some factors to consider include:
All target date providers make active asset allocation decisions when creating the glide path. This has a big impact on risk and return.
The chart below shows how TDFs composed of mostly passive underlying funds have a wide range of equity exposures at age 65, the age at which a participant is assumed to retire and begin taking withdrawals. Note the equity allocation at retirement ranges between 8% and 58%. Because asset allocation can drive results, fiduciaries should review the change in allocations along the glide path as the fund moves closer to its target date.
Equity exposure can vary widely in passive TDFs Percentage of assets in equity (as of 12/31/18)
Source: Capital Group, based on Morningstar data. Based on the eight target date series that have a three-year history and no more than 20% of assets actively managed.
Passive investments do not have inherently greater fiduciary protection than active investments. When selecting TDFs, sponsors should evaluate a range of criteria, including:
Taking an active approach to target date selection can help sponsors meet their fiduciary responsibilities while facilitating sound and productive retirement savings for their workers.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.