Target Date Funds: The Essential Guide
Because not all target date funds are created equal...
If there is one thing that's clear from recent history, it's that not all target date funds are created equal. But that's good. It means you have choices - provided you understand the differences so that you can choose the target date fund that is aligned with your goals.
But how do you start? We believe there are four core components of a target date fund that you need to understand before you make your selection. After all, the fund you choose can make a big difference to your participants.
Adding a target date fund, or changing target date fund providers, can be a complex process that requires unwinding existing agreements, transferring assets and setting expectations for participants. Clearly define your investment beliefs and choose a target date fund provider who can support your goals efficiently.
Choose the right vehicle and support
Your target date objective, glidepath strategy and asset allocation are the most important elements in driving investment outcomes. But the way you decide to deliver target date funds to your participants can also have an impact on participants' savings and outcomes over time.
Index or active management
Deciding whether to implement index or active management depends in part on your investment philosophy. Do you have a conviction that active management can generate better-than-market returns over time, or do you believe that capturing the market as efficiently as possible is the best way to generate long term returns? Or do you believe a mixture of active and index management makes the most sense?
Strategic or tactical management
Glidepaths are typically based on long term strategic economic forecasts. Allowing adjustments to the glidepath to capture near- term market movements can add returns, but can introduce additional risk. If you are exploring tactical glidepath or asset class management it is critical to understand how, why and when adjustments can be made – and whether the approach makes sense for your objective.
Collective trust funds or mutual funds
Collective trust funds (CTFs) leverage economies of scale and can reduce expenses for DC plans of sufficient size. CTFs agreements may also permit a wider range of instruments and strategies than some mutual funds. On the other hand, mutual funds offer additional transparency that makes them the preferred choice for many larger plans.
Special Investment or Participant Needs
Unique participant demographics or specific investment beliefs may be addressed through customization, or through the addition of specialized asset classes. Guaranteed retirement income can also be generated through specialized solutions.