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New TDF Rating: Beyond Performance

When it comes to analyzing investments, TDFs are different. Yet many people make the mistake of rating them like any other investment. 

TDFs are different because they are a portfolio of investments not meant to be switched out frequently. Most are being used as the plan’s QDIA, which means they are more important and carry greater fiduciary risk. Ron Surz, author of Fiduciary Handbook for Understanding and Selecting Target Date Funds: It's All About the Beneficiaries, argues that TDFs should not be judged solely on performance, but rather should be evaluated based on design, which includes the glide path, asset allocation and fees. 

Surz argues that funds that are performing well now are actually problematic because they have a high allocation of equities — which may not be right approach for a QDIA. Surz advocates for prudence over performance.

According to Surz, here’s what matters for TDFs:

  • Fees

  • Diversification

  • Glide path especially risk at retirement age

What does not matter, according to Surz, are:

  • “To vs. Through” because most people withdraw at retirement age anyway

  • Open vs. closed

  • Mutual fund vs. CITs

  • Bundled or not

Finally, Surz argues for less risk at retirement because:

  • Most people withdraw

  • There’s no fiduciary upside

  • The pain of loss is greater than the reward of gain

Here’s Surz scoring of TDFs v. Morningstar’s: