A Powerful New Approach to Target Date Fund Evaluation | Capital Group


A Powerful New Approach to Target Date Fund Evaluation

October 2016

A Powerful New Approach to Target Date Fund Evaluation

Intermediaries have a new way to differentiate themselves and increase the value they deliver to their clients. The new American Funds Target Date ProView tool provides a fast, powerful online platform to analyze and compare target date fund series to help make an appropriate selection for a DC plan’s participants. 

The Target Date ProView℠ approach combines the traditional evaluation process with detailed analysis to examine four critical aspects of a target date series:

  • Glide path
  • Risk
  • Returns
  • Expenses

By pairing traditional methods with deeper-dive metrics, fiduciaries can examine target date series more closely and effectively on behalf of participants. Doing so, and documenting the process, can demonstrate a commitment to due diligence, and give plan sponsors and participants confidence in the value of their target date series.

Dive Deeper Into the Glide Path

Examining a glide path’s percentage in equity and fixed-income gives only a limited picture of a series’ risk exposure.

Target Date ProView makes it easier than ever to examine the nature of a series’ equity and fixed-income exposure over time. That way, you can quickly see if the manager takes an evolving approach to risk within that allocation, and if so, how they execute that approach.

Volatility Over Time – Equity Only

Source: Morningstar®. Asset allocation as of 02/29/16 (updated quarterly per holdings reported). Standard deviation as of 02/29/16 (updated monthly).

Some managers adjust the components of their equity and fixed-income holdings over time to suit participants’ evolving needs — for example, by decreasing the equity portfolio’s exposure to higher-volatility stocks while increasing its exposure to lower-volatility stocks. By contrast, many target date managers simply maintain static weightings within the equity portfolio across the glide path.

Dive Deeper Into Risk Metrics

Conventional risk metrics such as Sharpe ratio and standard deviation only account for market risk.

For a more holistic view of the risks facing participants, Target Date ProView examines a series’ Retirement Efficiency Ratio.

Retirement Efficiency Ratio captures how well the fund balances the need to address the risk that retirees will outlive their savings (accomplished through its equity allocation) and the need to manage market risk (by limiting volatility). This assessment is important because those two risks represent the largest threats to participants’ financial security.

The Deeper View of Risk: Retirement Efficiency Ratio

Source: American Funds using Morningstar data. Retirement Efficiency Ratio (RER) calculation as of 2/29/16.

Dive Deeper Into Returns

Comparing a target date series’ returns to peer returns over various time periods should be only the first step in evaluating results. Target Date ProView lets you see how a fund series achieved its returns.

Plotting returns against standard deviation provides an intuitive, visual representation of how much risk the series has taken to achieve its results.

The Deeper View of Returns: Returns and Volatility

Source: Morningstar. Total Return as of 2/29/16 (updated monthly). Standard deviation as of 2/29/16 (updated monthly).

This approach can help identify whether the source of relatively strong returns was superior management or simply a greater appetite for risk.

Dive Deeper Into Expenses

Cost isn’t the only consideration when it comes to fund expenses. Also examine the value participants receive for the fees they pay.

Target Date ProView provides a fast way to determine value by juxtaposing a fund series’ expense ratio to its returns, then comparing the results to those of the fund’s peers.

Source: Morningstar as of 2/29/16 (updated monthly). Net expense ratio as of each fund’s most recent prospectus.

This analysis can uncover series that have justified higher fees by consistently delivering higher returns (in excess of those fees) over time. Remember that even small differences in costs and returns can have outsized impact on participants’ savings when compounded over decades.

Likewise, it can uncover lower-cost funds that consistently have underperformed their peers — undermining the benefit that participants might receive from lower expenses.

Diving deeper into these four key considerations provides greater insight into a target date series, helping make a selection that better meets plan objectives and participants’ needs. Financial professionals who have used Target Date ProView have said that the web-based tool makes it fast and easy to conduct this level of due diligence and document the results, both to serve existing clients and to capture new opportunities.

Start a deeper dive evaluation today or contact your American Funds representative to learn more.

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 or the collective investment trust's Characteristics statement, which can be obtained from a financial professional, Capital or your relationship manager, and should be read carefully before investing. 

Each target date fund is composed of a mix of the American Funds and is subject to the risks and returns of the underlying funds. Underlying funds may be added or removed during the year. Although the target date funds are managed for investors on a projected retirement date time frame, the funds' allocation strategy does not guarantee that investors' retirement goals will be met. The target date is the year in which an investor is assumed to retire and begin taking withdrawals. American Funds investment professionals manage the target date fund's portfolio, moving it from a more growth-oriented strategy to a more income-oriented focus as the fund gets closer to its target date. Investment professionals continue to manage each fund for 30 years after it reaches its target date.