Considerations for Evaluating Target Date Funds | Capital Group

Defined Contribution Insights

September 2016

5 Considerations for Evaluating Target Date Funds for Better Participant Outcomes

Use These Practical Ideas to Implement a Participant-Focused Target Date Fund Evaluation

To give participants a better chance for retirement readiness — and to satisfy fiduciary obligations — plan sponsors should have a process for evaluating and monitoring target date offerings.

American Funds believes in a five-point evaluation process. Presented below are the five considerations along with actionable ideas for each one.

Consideration 1: Participant Needs

  • Conduct a plan information audit to determine what participant data you already have.
  • Start planning ways to collect participant data.

See our in-depth discussion of participant needs in target date fund evaluation.

Consideration 2: Glide Path Construction

  • Examine the size of stock allocations throughout the glide path.
  • Search for a series whose investments in traditional asset classes provide high diversification without sacrificing liquidity or increasing fees.
  • Seek low-fee options that can provide opportunities beyond benchmarks.
  • Look for a series that takes an evolving approach to allocations within major asset classes to help lower volatility.
  • Assess how well a series balances equity exposure and risk by identifying a series with a high Retirement Efficiency Ratio.*

See our in-depth discussion of glide path construction in target date fund evaluation.

Consideration 3: Value Versus Cost

  • Analyze fees between target date series.
  • Check fees of different share classes.
  • Compare series’ returns against expenses to determine value.

See our in-depth discussion of cost vs. value as a factor in target date fund evaluation.

Consideration 4: Quality of Underlying Funds

  • Review the persistency of underlying funds’ returns.
  • Examine the consistency of underlying funds’ strategies and management.
  • Evaluate underlying funds’ approaches to diversification and risk management.

See our in-depth discussion of the quality of underlying funds in target date fund evaluation.

Consideration 5: Consistency

  • Check the stability of the fund’s approach, including its glide path.
  • Review series results, considering consistency and down-market protection.
  • Evaluate series management personnel and structure.

See our in-depth discussion of consistency and repeatability in target date fund evaluation.

* Retirement Efficiency Ratio illustrates a target date fund’s amount of equity per unit of volatility, which indicates how the fund balances market and longevity risk. Capital Group calculates the ratio by dividing the five-year average equity exposure by the five-year standard deviation. A higher number indicates greater efficiency in addressing both risks.

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. 

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.