Providers Scutinizing Target-Date Funds More Closely

The study, published by the Callan Investments Institute, surveyed 30 fund managers in March. Callan found that the majority of providers (53.3%) evaluate their glide paths annually, and 23.3% do so quarterly. However, due to recent market events, 85% of fund managers examined their glide paths between October 2008 and March 2009, according to a Callan release about The 2009 Callan Target Date Fund Manager Survey.

Just more than a third (34.5%) of fund managers made changes as a result of the interim review. Some managers that did make adjustments reduced the aggressiveness of the glide path, while others chose to improve diversification, Callan said.

“The majority of target-date fund managers are avoiding a knee-jerk reaction to the market crisis,” said Lucas, in the relesase. “They continue to examine the situation closely, but are being measured in their response.”

Aside from altering the glide path, 54.5% of managers made other target-date fund changes within the past six months. The most common change was to underlying funds/managers employed in the target-date funds (61.1%).

“Target-date fund managers know they are going to be held accountable for performance by managers within their funds and many are being proactive about eliminating under performers,’ said Lucas.

Anatomy of Target-Date Funds

Target-date fund glide paths continue to vary widely in terms of equity exposure and shifts in allocation over time across funds, according to Callan. However, variations are most profound in nearer-term funds.

Callan said equity allocations for 2010 funds in the survey sample range from more than 60% to less than 20%. Some later series’ target-date funds have equity exposure that is most conservative at retirement, while others will glide down well into retirement.

Variations in equity allocation and the use of asset classes can materially affect target-date fund performance, Callan noted. The worst performing 2010 fund in the sample lost 15.87% in the fourth quarter of 2008 and 34.48% for the year, while the best performing 2010 fund lost 6.20% and 12.92%, respectively.

Nearly 67% of managers reported that they take a strategic approach to asset allocation compared to 6% that take a tactical approach.

More information is available at www.callan.com.