It’s conventional wisdom that all investments in a retail DC plan must have a three-year track record. But do they still, and is three years enough? Or should we judge target-date funds based on a full market cycle?
For most TDFs, the point is moot because they already have a three-year history. However, innovation and the growing use of collective investment trusts (CITs) is leading some advisors to offer customized TDFs without waiting for three years, especially if the underlying glide path and asset allocation created by a well-known “allocator” has a history.
But the retail DC industry tends to lump TDFs together with other investments, focusing on fees and performance over a three- to five-year period, partly because it’s more convenient for advisors to report on them using off-the-shelf software.
Innovation, especially for investments, usually starts with the institutional market, which has embraced CITs and zero-revenue-share funds as well as custom TDFs. Larger plans looking beyond labels are less concerned about three-year track records of TDFs — and, with the growing use of index funds as underlying investments, why shouldn't they be?
TDFs are fundamentally different than other investments, so shouldn’t we report on them differently? More important than the underlying investments are the glide paths, most of which have a long history. And what if a TDF uses an investment that has failed a plan’s IPS but remains a major part of participants’ portfolios?
A promising trend for advisors looking to add value for clients rather than just pick off-the-shelf TDFs is to use third-party asset allocation models from respected vendors, deploying the underlying assets in the plans. It’s a model that American Airlines used recently when they reengineered their investment menus, and it’s almost impossible to benchmark.
What do industry execs think? I asked a number of well-respected experts, advisors and investment providers, and got some interesting answers. More on that in my next post.
Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.
