Tactical Latitude

Traditionally, the asset-allocation strategy for a target-date fund (TDF) has been rigid—relying on the fund’s predetermined glide path to dictate how its asset allocation changes over time to or through its target date. The glide path structure is intended to automatically, progressively, lower the riskiness of the portfolio, shifting to more bonds and income-producing assets and away from volatile areas of the stock market as the investor approaches retirement.

This practice proved challenging for some investors to stomach during the 2008 and 2009 recession, and some managers began to consider how to adjust their portfolios to meet such market conditions.

To increase flexibility in an asset allocation, some fund managers added the capability to employ a specifically chosen tactical deviation—typically from 5% to 10%—into their strategies. By way of this deviation, the investment manager can adjust a portfolio’s asset allocation based on short- to intermediate-term market conditions, either to increase or reduce equity exposure. This allows fund managers to manage more actively.

Of fund managers listed in the 2017 PLANSPONSOR Target-Date Fund Buyer’s Guide, 55% employ a tactical deviation.

Of the top five target-date fund suites by market share, Fidelity, T. Rowe Price and J.P. Morgan, respectively, allow for the use of this strategy. The other two, Vanguard and Principal Global Investments—also respectively—do not.

All, and only, managers that use a tactical deviation appear in the chart. Of the 18 fund managers that allow for the deviation, 78% may deviate from the glide path in all of their target-date fund suites, while 23% use a deviation in some offerings and not others.

Critics say using a tactical deviation changes a fund’s risk profile and that the funds’ risks and returns no longer align with participant expectations. Others say that top providers’ deviations are too weak when markets suffer significant losses.

All target-date fund series are built uniquely. Careful analysis is key to choosing the best fund for your participants.