What is a Target Date Fund?
Target Date Funds are designed to help participants match their investment strategy to the year they plan to retire or begin making withdrawals from their portfolio. The intent of these funds is to mimic a participant’s changing tolerance for risk as the participant approaches their retirement date. The Glide Path of the fund sets it’s allocation among various asset classes over time. Target Date Funds are aggressive in their early ‘accumulation years’, tapering to a very low-risk allocation at the target date (assumed to be near the beginning of a participant’s ‘spending years’). The asset mix is adjusted from more aggressive investments (stocks) early in the life of the fund to more conservative lower volatility investments (bonds) as the fund reaches it’s target date.
The popularity of target-date funds was triggered by the Pension Protection Act in 2006. As part of the Act, target-date funds were allowed to become the ‘default option’ of Defined Contribution 401(k) or 403 (b) plans that had an automatic enrollment feature.
Prepackaged Target Date Funds
The first generation of Target Date Funds are prepackaged and come in three different flavors:
- Proprietary funds are constructed as fund-of-funds, using only the investment vehicles of the mutual fund provider. A major disadvantage to these products is a lack of diversification among investment styles that often leads to under performance.
- Index funds are constructed using index funds as the underlying investment vehicles. The advantage of these funds is generally lower costs. The disadvantage is no opportunity to outperform the financial markets.
- Non-proprietary funds are a step in the right direction because a 3rd party investment manager selects underlying fund managers and allocation models. The problem with using these funds is that the underlying managers differ from the plan’s core fund menu.
Custom Target Date Investment Portfolios
Custom Target Date strategies provide plan sponsors with ultimate control of their DC plan that results in these advantages over prepackaged products:
- Use of ‘best in class’ funds from the plan’s core fund menu
- Choice of which asset classes to include or exclude
- Control over asset allocation and glide path
- Transparency of both costs and underlying assets
- Simplified employee communications (since the underlying funds are already being communicated as core options)
- Takes advantage of market opportunities using dynamic rebalancing of asset allocation, if desired
The use of Custom Target Date Funds should produce superior performance results over prepackaged Target Date Funds, due to the optimal asset allocation and use of ‘best in class’ underlying funds.
Glide Slope Philosophy
The underlying philosophy of a typical FiduciaryVest Target Date Glide Path is to structure robust, risk-controlled growth allocations in Target Date Portfolios that offer clients a choice as to the end-point allocation that will reflect an important overall, front-end assumption to be made by the plan sponsor… either:
- Participants are assumed to want to ‘take the money and run’ upon reaching their target date (Slope Pattern A…zero equities at the target date), or
- Participants are assumed to want/need a conservative, balanced portfolio of investments after the target date, because they will then be beginning a long investment draw-down period.
FiduciaryVest Target Date Glide Paths