The Markets July 27, 2021

The Art of Comparing TDF and Balanced Fund Performance

The outputs of a hypothetical model based on historical net asset values for balanced funds and target-date funds show just how complicated it can be to compare the relative merits of the two approaches to asset allocation. As it turns out, balanced funds, though less popular, might deserve another look.
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In 2007—around the time the Department of Labor (DOL) was finalizing its guidelines regarding permissible qualified default investment alternatives (QDIAs)—target-date funds (TDFs) were the default investment for 33% of plans responding to the annual PLANSPONSOR Defined Contribution (DC) Survey, while 20% of plans used stable value funds, 16% used a balanced fund and 6% used managed accounts.

More than a decade later, balanced funds and managed accounts, both of which offer the same safe harbor fiduciary protections as target-date funds—have become afterthoughts in the QDIA selection process and are now only used by 5% and 4% of plans, respectively. TDFs are now being used by 76% of plans.

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Given its dominant popularity as the default investment, it is natural to ask how TDF performance has compared with the alternatives—particularly balanced funds.

To answer this question, PLANADVISER’s Research and Survey team created a model that follows the “career” of an employee who started investing in one of a number of commonly used balanced funds and 2030 target-date funds around 2008. The model uses reported daily net asset value (NAV) prices to determine how many shares the employee would purchase each pay period and assumes that all dividends and capital gains were reinvested when paid. The model, in addition to comparing outcomes across the different balanced funds and TDFs, can also account for different deferral rates and employer match structures.

The goal of this exercise was to understand what the participant’s actual account balance would have been with each investment after 12 years of continuous, uninterrupted contributions. Although past performance is not indicative of future results, tracking actual outcomes based on actual data shows what might be considered actual results for participants from 2008 to 2021. As it turns out, balanced funds might deserve a closer look.

The Basic Findings

While the research team is still refining the model, the preliminary findings may surprise some. Overall, participants invested in balanced funds were very competitive with identical participants in 2030 target-date funds. In many cases, balanced funds outperformed the 2030 TDFs, with the average final account balance for the balanced funds in the first tests outperforming the average 2030 target-date fund by almost 6%. What was equally surprising was the range of overall outcomes among all funds tested, with the best performing fund returning a final account balance that was 26% higher than the lowest performing fund.

As the research team emphasizes, much work still needs to be done to improve the model and understand the factors influencing these results. The team looks forward to sharing additional findings from this project later in the year, but what seems clear from its early work is that balanced funds might deserve a more prominent place in the evaluation and selection of a plan’s QDIA.

A Few Notes of Caution

The snap reaction to this data could be that balanced funds are “better,” because they increased the ending savings amount by 6% in this theoretical example. In reality, however, there is some important context to consider before drawing any conclusions from this basic analysis.

The first point relates to market returns and whether one considers “baseline” market growth—that is, the rate of growth that would have been expected during this time frame based on historical return assumptions—or the “accelerated” market growth that has actually taken place since the mid-1990s. This is to say, it should be obvious that a fund that has higher equity allocations would have performed better during a period of accelerated growth. So, while one TDF with a higher-than-average equity allocation considered by the model may do better in this analysis, which considers the time frame of 2008 to 2021, a substantially different outcome might have been reached had the market returns differed.

Should retirement plan investors and their sponsors believe the outsized growth will continue? And, furthermore, it is necessary to ask what the return picture looked like during the theoretical savings journey mapped by the model. If one were to tabulate the outcomes after five or 10 years, the results are different.

Where the Rubber Hits the Road

Participant surveys conducted by the PLANADVISER/PLANSPONSOR research team have consistently shown that investors are willing to trade lower fees/returns for less market risk. This fact adds yet another layer of complexity in comparing potential options for a plan’s QDIA.

In the end, one cannot merely point to the data above and take this as proof that the typical retirement plan investor needs to use a TDF or a balanced fund. Furthermore, a given starting salary entered into the model (say, $40,000) that is assumed to grow every year might not be reflective of today’s middle-income or lower-income families.

In sum, investment models like this one are most helpful for demonstrating the multidimensional analysis that must go into the prudent choice of a QDIA, and their ability to provide definitive answers to highly nuanced questions may be limited.

The Markets July 27, 2021

Seeing the Bigger QDIA Picture

Are custom solutions worth the effort? Is passive more appropriate than active? It all depends on the adviser and the client.
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Art by Jam Dong


A close look at selecting and evaluating qualified default investment alternatives (QDIA) forces some questions about the value an adviser can add to the process. For instance, though advisers may be good at helping to craft custom funds, this might not always be appropriate.

Simply put, there are so many different low-cost, off-the-shelf solutions that most plan sponsors can typically find one that meets their needs, says Kevin Roloff, director of research at Francis Investment Counsel in Pewaukee, Wisconsin.

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“When it comes to custom target-date funds, the juice very often isn’t worth the squeeze,” he adds. “The top off-the-shelf products from the big guys out there are well-resourced and well-run. It’s a tall task for any adviser who wants to match that quality.”

Ryan Gardner, managing partner and head of defined contribution (DC) at Fiducient Advisors in Windsor, Connecticut, echoes that idea.

“For the vast majority of plans, assuming participant savings levels are appropriate, [off-the-shelf] is probably a fine choice,” Gardner says. “The value for customization comes when you have a unique plan demographic, such as if participants are retiring earlier or if they have some other benefits outside the plan that will provide more income in retirement.”

Plans might also consider a custom approach if they have a particularly risk-tolerant demographic, or if plan sponsors have some other specific visions for asset class exposure, Gardner says.

Adding Value

Plans that are well-served by off-the-shelf solutions are often better off directing their resources toward finding an adviser who can focus on participant advice and plan design—two areas that have a significant impact on outcomes.

“We are huge proponents of personalized advice,” Roloff says. “I love target-date funds, but the only input they use is age. Personalized advice allows for other inputs such as goals, willingness to take on risk and assets outside the plan.”

Steve McKay, head of defined contribution investment only (DCIO) at Putnam Investments, says that anything plan advisers can do to promote plan engagement can make a plan more successful.

“Spending time to get the right plan design and the right education program and engagement program on an ongoing basis is really important long-term,” he adds. “Advisers haven’t always focused on that, but we’ve come a long way.”

Even if they’re not building custom funds, advisers can add value by helping plan sponsors select between the many TDFs available in market. Advisers can provide key guidance in analyzing, making and documenting these decisions. For example, while a low-cost, passive fund can be a safe route from a fiduciary perspective, they’re not the best choice for every plan.

“There are a number of active target-date providers that are high quality and have a long history,” Roloff says. “We readily endorse those when a plan sponsor has the appetite for the increased onus of monitoring an active manager.”

Plus, with the race to the bottom in fees, the fee gap between active and passive funds has closed significantly, making advisers’ input all the more important.

“Active management, especially among the target-date providers that have a lot of assets, is actually pretty darn cheap,” Roloff says. “They’re very competitive in terms of free structures and sheer size. The have continuously passed along savings to participants in the form of fee reductions.”

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