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Are 3-Year Track Records Necessary for TDFs? Industry Insiders Weigh In

As I discussed in my last post, it’s conventional wisdom that all investments in a retail DC plan must have a three-year track record – but what do industry insiders think?

I posed this question to a number of well-respected experts, advisors and investment providers and got some interesting answers.

Dick Davies, AB Global’s Senior Managing Director for Global Head of Defined Contribution and Multi-Asset Business Development, comments: “We see a real difference between the beliefs of advisors serving the small plan (typically mutual fund) market and large plan sponsors who are more likely to make their own decisions with or without the help of a professional advisor. Given the growth of the co-fiduciary platforms, the importance of the 3-year track record has taken on near-religious significance. While we also hear claims that it is a requirement of many IPSs, that doesn’t appear to be the case very often. Of course a 3-year requirement plays nicely into a mechanistic screening process thereby requiring less judgment from an investment analyst. It also means that innovation will take longer to reach the small end of the market.”

Davies continues: “At the other end of the spectrum, the hundreds of plans that have moved to custom TDF structures have made the move without the benefit of an overall track record of any kind. While they were able to assess the historical performance of underlying managers – arguably more relevant than the records of the overall portfolios – they have had to design asset allocations with an eye towards the future rather than the past. In general these plans have been sophisticated investors who were able to exercise judgment on the future environment several decades out. In other words, their investment committees have had to do a bit of work – which is their job.”

“A 3-year track record is not necessarily required so long as the track record of the asset allocation portfolio management team is historically sound,” notes Chris Karam, CIO at Sheridan Road. “This could occur when an existing asset allocation team begins offering a target date series… The other scenario is… the glide path remains the same while the execution of the asset allocation is altered. This is currently working well for [TDFs] featuring passive equity index strategies and active fixed income.”

Greg Porteous, DC Managing Director at SSGA, agrees: “From an investment management perspective, if we are talking about a passive TDF that uses standardized existing investment vehicles as the underlying strategies (e.g., a CIT that invests in S&P 500) then you don’t really need a 3-year track record. The investment process is transparent and rules-based and it should be easy to accurately back out what the performance would have been.”

Notes Dorann Cafaro, a longtime DC advisor and now in the business of helping advisors evaluate TDFs, “To evaluate a TDF, one does not need to wait for at least 3 years if one uses comprehensive data measurements.”

Lastly, Davies suggests: “If the statement ‘past results are no indication of future performance’ ever made sense, it is especially true for asset allocation portfolios. The capital markets of the next 20 years are going to be dramatically different from those of the past two decades. We’ve just gone through a cycle during which time diversification didn’t pay. Simple TDFs look great in the rear view mirror. Will this be true going forward? More than for any other asset class, plan committees must look at the future in selecting target date designs.”

Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.

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