“We are going through the next cycle of target-date
fund [TDF] awareness,” says Doug Murray, director of sales and investments
at Wells Fargo Institutional Retirement and Trust. “When target-date
funds were first coming into prominence, some plan sponsors tied the
target-date fund decision directly to the platform decision. Now there
is a much more systematic view. Plan sponsors need to do a much more
thorough evaluation, not just [ask], ‘What is the one-, three- and
five-year performance?’”
For sponsors evaluating their plan’s target-date
funds, also known as lifecycle funds, advisers can help bring clarity
to these five areas:
1) Evaluate whether the glide path reflects the sponsor’s
philosophy. Many sponsors initially just accepted their recordkeeper’s
target-date funds and now need to decide whether these actually work
best for that particular plan. “From a fiduciary perspective, the
plan sponsor needs to take a step back and understand [the plan’s]
objective,” says Tim Walsh, a TIAA-CREF managing director. “Is
the plan meant to be an accumulation plan or a retirement-income plan?”
J.P. Morgan Asset Management offers the Target Date
Compass, an adviser tool used to help a sponsor decide which of four
target-date types works best for that plan, and then map out which particular
managers mesh best with the employer’s plan goals and work-force needs.
Advisers should help sponsors achieve a good sense of how they view
risk, such as which type matters most for those participants, especially
among longevity, inflation and market risks (particularly near or in
retirement). “It does somewhat come down [to] a philosophical discussion
and their tolerance for, at age 65, participants having a major market
event and seeing their capital greatly reduced,” says John Galateria,
a managing director at J.P. Morgan.
Market risk looms large in the strategy of some target-date
providers. ING U.S. Retirement’s glide path begins more aggressively
with equity than some because people have time to absorb the volatility,
says Marianne Sullivan, head of investment information services. “As
people approach retirement, our glide path tends to be more conservative
than some others’. The five years or so prior to retirement are the
most important in terms of downside risk.” And if someone’s
account drops sharply a short time after retirement, she says, “it
is very possible that he or she can never make up that loss.”
American Century Investments also relies on the “to”
approach. “Financially speaking, the riskiest day of your life is
the day you retire,” Senior Portfolio Manager Richard Weiss says.
“At retirement, you should be at your minimum risk posture. A target-date
fund is built for the entire life cycle, to hold. But it does no good
if the ride is so wild that an investor cannot, or will not, hold on.”
Others point to longevity risk. The glide path of
TIAA-CREF’s TDFs, which focuses on the not-for-profit and higher-education
markets, continues until age 75, Managing Director Randall Lowry says.
TIAA-CREF participant demographics explain the decision
to continue the glide path past retirement. “The[se participants]
have a longer life expectancy than the general population, so they have
a heightened longevity risk,” he says.
Someone who retires at age 65 and lives until 90 needs
another 25 years of asset allocation, says Jeff Tyler, a Principal Funds
portfolio manager. “The ‘through’ retirement philosophy is
essentially saying that retirement, while certainly an important event,
is not quite the all-encompassing event that a lot of people think.
A lot of people plan to be partially employed in retirement, and a lot
of [actively employed] people do not know whether they will retire at
65 or at 70.”