A press release said that based on the aggregate scores of five components (with 100 points being the maximum), each target-date fund series earns one of five ratings: Top, Above Average, Average, Below Average, or Bottom. Morningstar will review and update the ratings annually.
The five components, according to the release, are:
- examines the fund series’ management team and how well Morningstar thinks they’ll serve shareholders over the long term, and incorporates factors including management tenure, past performance, and research support;
- considers the criteria used to determine fund managers’ compensation and whether or not the incentive is to deliver strong long-term returns to shareholders; also assesses the manager’s financial commitment to the fund through direct ownership of shares;
- assesses the fund board overseeing the target-date series by determining if the fund board is sufficiently independent of the fund adviser and whether or not the board has consistently acted in shareholders’ best interest.
- evaluates whether fund companies consistently put shareholders’ interests first;
- examines how well fund companies explain how their target-date funds operate to current or potential shareholders in their publicly available materials;
- notes any regulatory issues at the fund company within recent years.
3. performance—assesses how well a series of target-date funds has performed historically relative to its peers on a risk-adjusted basis, taking into account the relatively short performance histories of many series, and assigns a score to each target-date fund series based on a comparison to the universe average.
4. portfolio—calculates a weighted average Morningstar Rating for Funds (the “star rating”) for the underlying holdings in the series to determine the investment quality of the funds.
- assesses the actual costs investors pay by selecting the lowest-cost share class that has at least 10% of the overall assets in the target-date fund series. The net prospectus expense ratios for that share class are then averaged across all of the funds in the series;
- assigns score to each target-date fund series based on a comparison to the universe average.
Each research report will contain detailed commentary by a Morningstar fund analyst on all aspects of the scoring, as well as additional analysis of non-scored aspects of target-date funds’ structure and components, Morningstar said.
Reports about participant misconceptions of target-date funds (see “Workers Might Have Wrong Idea about Target-Date Funds“) as well as the wide range of equity allocations for different funds (see “Target-Date Funds Display Wide Range in Equity Allocations“) has led the U.S. Senate (see “Senate Committee Takes Aim at Target-Date Funds“) and the SEC and DoL (see “More Details Released about Target-Date Hearing‘) to take a more intense look at them.