Vincent Fu
Saving for retirement is a complex task, and success is determined by many factors, including contribution rates, salary growth and an appropriate asset allocation. This isn’t easy, especially for millions of Americans in self-directed defined contribution plans who don’t have the benefit of professional advice.
Since the Pension Protection Act of 2006 opened the door for target date funds to be offered as qualified default investment alternatives (QDIAs) for plan participants, the all-in-one, age-based multi-asset solution has swelled in popularity, raising total assets under management in U.S. target date funds to more than $3 trillion.1
But what advantages do target date funds offer participants over self-directed fixed allocation static portfolios? What are their disadvantages? And what are the considerations for plan sponsors and fiduciaries as they seek to build better investment menus?
Key takeaways:
- Despite ongoing growth, target date funds are coming under new scrutiny
- Target date fund glide paths have the potential to deliver less dispersion in outcomes than static portfolios, but may have lower ending balances than high-equity fixed allocation portfolios
- It’s worth considering a target date solution that allows for higher-equity allocation
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1Correia, Margarida. “Target-date fund assets reach $3.27 trillion in 2021,” Pensions & Investments, March 23, 2022.
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