Defined Contribution Insights
The Pension Protection Act took effect 10 years ago, leading to a surge of assets into target date funds. In this video, principal investment officer of American Funds Target Date Retirement Series® Brad Vogt shares his thoughts on what we’ve learned over the past 10 years, including:
Craig Duglin: Craig Duglin, Target Date Product Manager at American Funds, joined by Brad Vogt, longtime portfolio manager of the organization, one of the portfolio managers on the American Funds target date series, and currently serving as its Principal Investment Officer. Brad, thanks for joining us.
Brad Vogt: Thanks Craig.
Craig Duglin: In the past 10 years since the passage of the Pension Protection Act, we’ve seen a particularly dramatic rise in target date assets. What has surprised you the most about target date funds?
Brad Vogt: You know, it’s been remarkable. Target date assets have grown from $100 billion about 10 years ago to over $1 trillion in the category today. And I really think it’s natural because for the first time, plan sponsors and employees have a lifetime program where the asset allocation makes sense for their age.
And it’s become the natural default alternative. Not the only default — we’ve got some very good balanced funds and other funds that are used for default alternatives — but this has become a really natural area.
And we’re really just getting started in a way. Only 20% of the assets in defined contribution 401(k) are in target date. So there’s a long way to go. The other thing that’s been striking is in the medium to large end of the market – large plans. What we’ve seen over the last 10 or 15 years is the separation of the decision by the plan sponsor, between the recordkeeping service and the target date investment management.
In the early phases of the industry, plan sponsors usually just took the target date glide path from the recordkeeper. Now they’re viewing those as two very distinct decisions. Sometimes it could be the same organization that does a great job on both, but often you want a separate organization. And so that's been a big development.
The other two things I would point to are, interestingly, the narrative on fees. Fees are obviously very critical. But we see people I think myopically looking at fees when they look at passive glide paths. Fees are embedded in results. So it’s not as if you have your glide path results and then you subtract fees. And what you really want to focus on is outcomes, and results net of fees. We’ve proven for a long time at American Funds that our individual funds and our glide path can produce better outcomes than a passive solution net of fees.
I’m also surprised that there hasn’t been more focus looking under the hood of the various glide paths. A lot of focus on the top–down asset allocation, stock and bond. Not as much focus on what actual stocks and bonds those investors own. And that’s where I think we have a real advantage.
Craig Duglin: So one debate that has not quieted down is active versus passive. And the target date category is no exception. What are your thoughts on this topic?
Brad Vogt: The active/passive question has been a big focus for the target date industry. And I think, in some sense, it's easy in a way if you’re a fiduciary, a plan sponsor or a consultant to say, “If I pick active, I might risk having a bad manager.” The problem is in terms of participant outcomes, there's a real risk of picking passive, and I think people need to focus that quite a bit more.
We’ve looked at studies where, for the lifetime of an employee, if you can outperform a passive glide path by 50 basis points, it turns into six years of additional retirement income. And if you can outperform by 100 basis points, it’s 12 years of additional retirement income. That's a big deal that changes people’s lives. I think people really need to look under the hood of glide paths and not just focus on the top-down asset allocation and the fee level, because fees are included in results.
Craig Duglin: The American Funds target date series turned 10 this year, Brad, and it has some of the strongest results in the industry. What do you attribute that success to?
Brad Vogt: I think the biggest success is the underlying funds. A glide path is only as good as the underlying funds that it's built on. And we are proud to have some of the finest funds in the industry.
I think our mindset as an organization, our DNA, is to think about things the way that a retirement investor and a retiree would think about them, which is, “let’s have the best return we can for the lowest unit of risk.” Our glide path takes that same mindset. We try to have the best balance of building wealth in the accumulation phase, and preserving wealth in and around retirement.
And the way we do that is that we have a glide path within our glide path. So it’s not just the amount of equity or bonds, but it's what type of equity? When you’re 20 years old, we have more growth funds. When you're 45 years old, it’s a mix, and when you’re 70 years old, you still need significant equity but you want the right kind of equity — higher dividend- paying, lower volatility type of equities.
Craig Duglin: So what gives you confidence the series can continue to provide strong results?
Brad Vogt: I think the biggest confidence is the bedrock of our underlying funds. Our organization goes back so long. Seventy-five percent of the underlying funds have track records of 25 years or longer. So we've seen up markets, down markets, strong dollar, weak dollar, rising interest rates, falling interest rates. And I think we have a better ability than most investment managers to understand how a combination of funds will work together. So I think that will help us tremendously.
I also want to mention fees, because fees are critical and fees come right out of your results. We have low fees. It's based on the low fees of underlying funds. And we pass that right on to investors, and we think that's going to be a significant benefit, long run.
We have a system of our Portfolio Oversight Committee, a group of seasoned portfolio managers who have experience in many of the underlying funds, and connected to that, a tremendous quantitative group that helps with analysis and research in the glide path in our series.
In addition to our multi-asset funds, which give us flex on equities and bonds, we have a number of global funds, which have flexibility to invest around the world. And that provides us with the shades of gray on U.S., non-U.S. in various countries. Our experience managing active funds globally is longer than any other asset manager in the industry. And we think that's a real advantage.
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 mutual fund prospectuses and summary prospectuses, which can be obtained from a financial professional, and should be read carefully before investing. Similar information about collective investment trusts can be obtained from Capital Group or participants’ plan provider or employer.
Although the target date portfolios are managed for investors on a projected retirement date time frame, the allocation strategy does not guarantee that investors' retirement goals will be met. The target date is the year that corresponds roughly to the year in which an investor is assumed to retire and begin taking withdrawals. Investment professionals manage the portfolio, moving it from a more growth-oriented strategy to a more income-oriented focus as the target date gets closer. Investment professionals continue to manage each portfolio for approximately 30 years after it reaches its target date.
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.
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.
Past results are not predictive of results in future periods.