It may have been 20 years since Sgt. Pepper taught the band to play, but their music stopped long ago. Not so with the target date fund concept, which celebrates its 20th birthday this month, and is still growing in popularity and complexity. Wells Fargo and Barclay's debuted the first TDFs in March 1994 -- followed by Fidelity in 1996, The Principal in 2001, T. Rowe Price in 2002 and Vanguard in 2003.
With a warning that those who try to predict the future in the retirement business are nearly always wrong, Mark Pfeil, managing director of investment research at SageView, shared his perceptions at a March 24 NAPA 401(k) Summit workshop about what the future may hold for TDFs after the birthday party is over:
Active vs. passive: This debate will continue, driven by a focus on fees
More alternative asset classes in TDFs; a trend to keep an eye on as fees come down
Customization may move down market
Convergence of the investment manager and the consultant
An increase in tactical approaches to allocation
More detailed analysis, and benchmarking requirements
Metrics: As TDFs develop track records over time, we will be better able to measure their success
Risks to bond portfolios in TDFs in a low interest rate environment
Addition of an annuity option
Movement away from all proprietary products
Risk management in TDFs
Continuation of the to-versus-through debate
Providers will offer different strategies (e.g., low, moderate and high risk) within a single product
Does it really make sense for equity allocation to decline throughout retirement?
Fellow panelist Scott Matheson, senior director and DC practice leader at CAPTRUST, outlined the key decisions that must be made regarding today's increasingly complex TDF products:
The to-versus-through glide path decision leads to decisions about the slope and shape of the glide path
In addition to the active versus passive choice, we now have a third option: a hybrid approach, or blend of active and passive
Proprietary product versus open architecture
Off-the-shelf versus custom
Vehicle selection -- mutual fund, collective investment trust, or even separate accounts for some clients
What's the role of TDFs in the plan?
Plan design changes
Brand name, or not?
Record keeper restrictions and availability (this is not as big a deal now as it was a few years ago)
Record keeper admin costs and revenue sharing desires
