The Markets May 3, 2011

Differences Subtle between “To” and “Through” TDFs

It remains very difficult for investors or plan sponsors to tell if a target-date fund (TDF) is intended to be a “to” or “through” offering simply by looking at the funds’ asset allocation or glide path.
Reported by

Morningstar’s Target-Date Industry Survey explains that funds with unchanging glide paths after their target dates are said to be “to” because the target-date fund provider is not attempting to model investors’ risk/return needs during the retirement period, and therefore, the series’ asset allocation or glide path should not change. In contrast, those with glide paths that continue to change after their retirement date are said to be “through,” modeling investors’ needs during the years following retirement.   

Morningstar found there is no asset allocation consensus in the industry regarding the prevalence, superiority, or clear categorization of “to” or “through” glide paths. Of the 41 glide paths Morningstar examined, 22 fell into the “through” group, with the remaining 19 landing in the “to” camp.  

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

The “to” and “through” samples look very similar in their asset allocation when investors are in their early earning years. For target dates 2055 through 2040 (intended for investors ages 20 to 35), the average equity allocations are nearly identical, roughly around 90%.  

It’s when investors get closer to retirement that the differences start to show up, as “to” series typically move more rapidly toward the lower final equity point. The 2020 funds show a 14 percentage-point difference in equity allocation, for instance, and that difference grows to 16 points by the retirement date. At retirement, the “through” funds average a 49% stock allocation while “to” funds land at 33%.  

It’s not until 10 years later that the glide paths meet up again, as “through” glide paths hit an average allocation of 33%. Some “through” funds reduce their exposure to stocks over an additional five to 15 years.  

So it’s in that 20-year band around the retirement date that the differences are most stark. Clearly, “through” glide paths on average carry higher equity risk, fitting the belief that the risk of retirees outliving their nest egg requires more stock investments, over longer periods, in order to raise the probability of those assets lasting through retirement. “To” paths, as advertised, cut down equity to a more manageable level by retirement, reducing the risk that investors’ assets will experience a catastrophic decline just prior to their time of need.  

The distinction between “to” and “through” funds is an important one because one type of offering may be more suitable for a plan sponsor than the other, given the unique characteristics of their plan participants. 

The Markets May 3, 2011

Investors Still Contribute to Target-Date Funds after Retirement

Asset managers are just starting to observe how investors use target-date funds (TDFs) after reaching retirement.
Reported by

In its Target-Date Industry Survey, Morningstar looked at Fidelity Freedom 2000 – which has existed for more than a decade since its investors’ retirement date. Looking at all three Fidelity Freedom 2000 funds (Freedom, Freedom Index, and Freedom K), reveals that the strategy received steady inflows leading up to 2000. At retirement, some investors withdrew their money, but during the ensuing four years, others continued to add to the strategy. More than 10 years after the retirement date, the strategy’s total net assets have continued to grow without any substantial outflows (over $52 million in inflows in 2010).  

Among five firms with funds offering a 2005 retirement date (AllianceBernstein, Fidelity, GuideStone, T. Rowe Price, and Vanguard) thus far have followed a similar pattern, according to Morningstar data. The data reveal a trend of heavy inflows leading up to the retirement date, followed by several years of continued inflows at a slower, but still positive rate (over $120 million).   

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

The 2010-dated funds (among 27 asset managers) represented provide the most diverse set of examples, but they’ve only recently passed their retirement date. The current trends, though, echo those seen with the 2000 and 2005 funds. Even funds designed for withdrawals at retirement (as determined by whether the fund’s allocations remained level after the target date) continued to see inflows in 2010 (nearly $224 million for “to” retirement funds, over $134 million for “through” retirement funds).  

Morningstar noted that because the data do not account for individual investor behavior, it’s entirely possible that shareholders of a fund with a target-retirement year of 2000, 2005, or 2010 did not actually retire during that year. What’s more, some 401(k) platforms may have only recently started including target-date funds, which could cause inflows to overshadow investors withdrawing from their accounts.  

Morningstar said the fund flow data suggests investors may benefit from a longer “through” glide path, but if there are many investors with small balances cashing out at retirement, then a “to” glide path may be a more prudent choice. If a plan or plan sponsor serves a constituency that tends to work longer or well beyond the stated retirement dates, a “through” glide path may be more appropriate. 

«