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.

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.  

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.