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READER RADAR: Readers Target Broad Criteria Array for TDFs

Target Date Funds

Target-date funds have been in the headlines of late—and not always in a good way—this week, as we did last week on managed accounts—we asked NAPA-Net readers about their TDF focus.

That’s right, the headlines are full of litigation involving target-date funds (well, a couple in particular)—at least one notable TDF critic has criticized their equity-heavy glidepaths near retirement, and a recent report says the Labor Department should (re)consider its decade-old guidance for plan sponsors in selecting those options.

We started by asking how many target-date families/suites that readers typically considered in making recommendation. Suffice it to say, there was a broad focus:

30% - 4

23% - More than 6

15% - 5

13% - 3

8% - 2

7% - 1

3% - 6

We then asked readers what criteria they used in evaluating target-date funds (more than one response was allowed):

92% - Performance

92% - Fees

92% - Glidepath

69% - Match with plan demographics

36% - Tie in with recordkeeping platform

34% - Brand name/recognition

21% - Revenue-sharing structure

Other things mentioned included: 

We vet the RK proprietary in conjunction with an independent assessment because of potential fee reduction. We arrive at a fiduciary-based decision.

Going forward TDF products need to include options for retirement income solution.

Drawdown Analysis of the 9 periods since 2008 in which the S and P has declined more than 10% is used to examine those Vintage closest to Retirement, and in addition to these other aforementioned checked boxes, while secondarily considering the Upside Criteria on the Vintages furthest from retirement.

Active vs. passive exposure. To vs. through retirement.

Philosophy of committee—e.g. do they consider longevity risk or volatility risk to be the bigger risk.

Process consistency active v. passive.

Risk profile, Sharpe Ratio, Up/Down capture.

We discuss philosophy regarding index fund vs active fund based investment management of underlying funds.

Risk Management

Active vs Blend vs Passive approach—look for investment committee’s thoughts on each.

In addition to match plan demographics, we look at the ppt behavior, do they cash out early, rollover or sit till RMD.

Inception Date Track Record Team Strength

Suitability as outlined in DOL tips, noted demographics above but also: - other retirement benefits - is a DB plan offered - participant behavior, i.e. how do your participants react to a 20% market decline or what do they do with their 401k plan when they retire.

Underlying investments, decumulation components

Inclusion of alternatives; allocation to international and emerging markets; risk-adjusted return factors.

Safety at the target date

Plan Sponsor Preferences

Oh—and then we asked about plan sponsor priorities—their primary one:

32% - Performance

24% - My recommendations

14% - Fees

10% - Match with plan demographics

7% - Brand name/recognition

5% - Glidepath

2% - Tie in with recordkeeping platform

Other Comments

Readers had a number of other comments to share on this subject—here’s a sampling:

It is very difficult to match the target date fund with the participant demographics.

In plans where we have target date fund families that have high equity landing points, we add a second target date fund family that has demonstrated their value during market drawdowns. We educate heavily on both.

Our team has really pushed to educate our plan sponsor committees to shift the focus from performance/expense FIRST, to “what does my participant-base look like, and which suites would be the best fit from a glidepath/landing point?” first. After we identify the 3-6 finalist that align well with their participant-base, the focus shifts to each one’s glidepath investment composition (e.g. fund-of-funds, active vs. passive, growth vs. value, exposure to alternatives, manager rebalance frequency, etc.). The LAST area of consideration then becomes the performance, risk metrics (specifically up-market and down-market capture ratios), and expense ratio.

Sponsors want brand. We try and match (and I hate these terms) a “to” or “through” with client. We look at active vs passive. I like * with three glidepaths to offer a compromise on this concept. Private labeled * TDFs through record keepers are attractive to me and clients once they know what we are talking about.

I think the ratings agencies like Morningstar / Lipper, etc. should have an equity / income split for the target date funds like the risk based funds. You can sort balance funds by 50-75% equity and see the funds. You can’t easily do this with target date funds.

Distribution phase capability

Glidepath is important, but an advisor has to check to see if the series volatility metrics actually fall in line with what you would expect from the reported glidepath.

Having the evaluation process, considerations, and justification for a final decision along with the collateral reviewed documented is critical.

There’s a reason for showing more than 6 TDFs. There are a huge amount of TDFs out there so to try and keep some objectivity around it, we start with the 5 largest TDFs and then we add in TDFs that concentrate on risk mitigation (e.g. low equity glide paths) and then one that is “open arch” TDF. We do a TDF deep dive every 3Q for every client ... last year, we used * as the low volatility TDF and * for the multi-manager/open arch. In addition to the above, we use a lot of risk/reward charts to help clients differentiate TDFs.

Plan Sponsors review what participants do when they retire (keep money in plan or rollover), based on review the next step is glidepath, fees, performance.

Seems like the campaign against target date funds began right about the same time that mutual fund companies who do not have target date funds started pushing managed accounts...

You can talk about glidepath but ideally sponsors just want to see performance and fees

Always difficult to make an apples to apples comparison as each asset manager’s portfolio and glidepath are different. In addition, the to/through strategy needs to be considered closely.

Target date funds are useful as they only require the single point of data for a recordkeeper to assign a TDF to a participant if there is automatic enrollment or non-elective contribution. Ideally, determination of an appropriate TDF takes into account the risk-reward of the underlying funds in combination with participant demographics. There are two levels to this: first is glidepath, which is stance of TDF manager regarding their construction, second is their “execution” which is how the series actually performs net of their management fees. Sadly, because there is so money flowing to these funds by un-engaged participants and their plan sponsors, there is an easy market for non-transparent collective trusts that blur their performance with the index assumptions for their glide-path construction, and not the actual fund performance and more importantly, how many “bites of the apple” are being taken by the various companies in the sales chain who have built the funds. In addition, the myriad of collective trust TDFs with their “specialized pricing” is a building to be a huge mess for recordkeepers, and ultimately (I think) will backlash to increased pricing and more lawsuits.

I don’t think it is one primary criteria, it is a mixture of fees, brand, and performance.

It’s disturbing that plans get sued for using cheap, expensive, low performing, ‘shoulda’ performers etc... nothing’s perfect and now we’re getting sued if we’re not.

Need to see more about what and when they make adjustments type of industry what else do they offer.

Custom is better than off-the-shelf when they are available and are truly customized.

Frequency of evaluation is lacking. Performance is reviewed quarterly but suitability is often not reviewed. This should be conducted with a material change (to the TDF or organization) or part of an annual review process.

There appears to be a trend toward custom target-date solutions, particularly in larger plans.

Recent BlackRock lawsuits are preposterous.

We compare glide paths to see where equity and asset class exposure is and how it aligns with plan demographics. Then performance is evaluated against their peers by retirement date as well as asset allocation since different glide paths can mean very different things by target date.

We’ve forgotten 2008, but shouldn’t. TDFs are now $3.5 trillion, vs $200 billion in 2008. And 78 million baby boomers are in the Risk Zone, while they weren’t in 2008. The stakes are much higher today, & fiduciaries are still making the very bad bet that they made in 2008.

Thanks to everyone who participated in our NAPA-Net Reader Radar poll!