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Study Reveals Sweeping Allocation Strategies for Custom TDFs

Target Date Funds

Running the gamut from “growth” to “defensive,” new research documents the extensive asset allocation strategies among custom target date funds. 

Noting there is a wide range of information available on the performance and asset allocation strategies of packaged TDFs but little comparative information on custom TDFs, the Defined Contribution Institutional Investment Association (DCIIA) launched a research initiative in 2017 with an eye towards better understanding custom strategies.

In its inaugural survey on this issue, DCIIA found that a majority of the average custom TDF exposure was allocated to equities and fixed income, with a relatively modest – but increasing – allocation to inflation sensitive assets 15 to 20 years prior to retirement. Diversifiers were found to represent a minor – but relatively consistent – average allocation.

Survey participants were asset allocation service providers for custom TDFs that submitted non-attributable plan statistics and asset allocation detail for custom TDF clients. The sample reflects 65 plans and 673 unique funds, with the custom TDF assets exceeding $340 billion and plan assets exceeding $990 billion. With its sample accounting for nearly 80% of the total market, DCIIA estimates that the total custom TDF market was $430 billion at year-end 2017. 

Equity Allocations

As for the specific breakdown of equity allocations in custom TDFs, the study shows that the high (95th percentile) allocations ranged from to 92% for 2060 funds to 39% for income funds. Similarly, low (5th percentile) equity allocations ranged from 72% for 2060 funds to 12% for income funds. 

DCIIA further determined that the average allocation to equities for 2060 funds was 85%, declining to 28% for income funds. The spread between different custom TDFs was greatest for the 2025 and 2020 vintages, at 33 percentage points between the 95th and 5th percentiles, the study notes. 

The top five equity asset classes by prevalence were: 

  • U.S. large-cap equity (89%);
  • Non-U.S. developed equity (69%);
  • Emerging markets equity (66%);
  • U.S. small-cap equity (49%); and 
  • U.S. small- and mid-cap equity (29%). 

The study notes that global ex-U.S. equity was prevalent in 22% of custom TDF strategies, while the remaining six equity asset classes each had less than 20% prevalence among plans. 

Fixed Income Allocations

At the low end of exposure, the 5th percentile fixed income allocations ranged from 32% for income funds to 5% for 2060 funds. Similarly, the study shows that the 95th percentile equity allocations ranged from 67% for income funds to 13% for 2060 funds.  

The average allocation to fixed income for income funds was 52%, declining to 7% for the 2060 fund. “Differences between the 95th and 5th percentiles varied little for later-dated funds but peaked at 35 percentage points for the income allocation,” the study explains.  

The top five fixed-income asset classes by prevalence were: 

  • Core U.S. bond (94% – the highest percentage of any custom TDF underlying exposure); 
  • Short-duration bond (49%); 
  • High-yield/high-income bond (35%); 
  • Cash (29%); and
  • Emerging markets bond (20%). 

Stable value was prevalent in 20% of custom TDF strategies, while the remaining six fixed-income asset classes each had less than 10% prevalence among the plans, the report notes. 

Inflation Sensitive Allocations 

“Unlike those for equity and fixed income, the 5th percentile allocations for inflation-sensitive assets were relatively consistent across vintages and showed little range around 4% to 6%,” the authors observe. They note, however, that the range for the 95th percentile was “more pronounced” – from 46% for income funds to 14% for 2060 funds. 

The average allocation for these assets for income and 2015 funds was nearly 18%, while vintages between 2040 and 2060 hovered near 6%. The authors emphasize that the custom TDF sample “demonstrated consistency” in inflation-sensitive exposure among later-dated funds designed for younger plan participants. They further observe that, as average allocations to inflation-sensitive asset classes rose, the spread between the 95th and 5th percentile allocations peaked for the retirement allocation fund at 41%.

The top five inflation-sensitive asset classes by prevalence are TIPS bonds (72%), real estate (48%), commodities (38%), real assets (23%), and global REITs (11%). 

Diversifier Allocations

Similar to inflation-sensitive asset classes, the 5th percentile allocations for diversifier assets were relatively consistent across vintages and showed little range around 1%, the report notes. In addition, allocations were also consistent in the 95th percentile – between 17% and 20% – with the exception of income funds, which had a 95th percentile allocation of 30%. 

The top five diversifier asset classes by prevalence were bank loans (6%), hedge funds (6%), GTAA (5%), preferred (3%) and U.S. balanced (3%). 

Contributors to the custom TDF research initiative included Joshua Dietch of T. Rowe Price, Brett Hammond of The Capital Group and Chris Nikolich of AB, along with DCIIA research consultant Bridget Bearden. DCIIA notes that while the study’s first iteration was limited to asset allocation data, future areas of research may include comparative glidepath analysis of “to” versus “through” strategies, corporate versus public DC plans or “off-the-shelf” versus custom structures. 

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All comments
5 years 1 week ago
Hope you found it helpful and informative.
sfox
5 years 1 week ago
Thanks for posting this!