Retirement Advisers Say Long-Term Performance Most Important for Evaluating TDFs

Four out of five advisers said investment performance over at least three years is key in picking TDFs for plan menus, according to Cerulli.

When evaluating a target-date fund, retirement advisers consider long-term investment performance (more than three years) to be the most important factor, with 80% saying it was very important, according to Cerulli Associates research released Wednesday.

The second most important factor when considering TDFs is cost, which 76% of advisers consider very important. This was followed by 70% of advisers marking the diversification of underlying asset classes as a very important factor.

The research comes as TDF providers saw another strong year of inflows in 2022, though slightly off from 2021, as volatility rocked the markets. Net inflows for TDFs came in at $153 billion in 2022, down from $170 billion in 2021, according to recent Morningstar data.

Advisers gave both the cost and the diversification of underlying assets greater significance than in prior years, according to Cerulli. The Boston-based consultancy suggested that advisers may be looking for a proven track record of reliable performance, given the recent market volatility and potential economic contractions.

At the other end of the spectrum, only 5% of advisers said environmental, social and governance factors were important when evaluating TDFs for plan inclusion. More than half of advisers (52%) even said ESG was not important.

Advisers also reported that IRA rollovers are a frequent discussion topic with DC plan participants and advisers. As part of DC plan advisers’ business models, capturing rollovers is still an essential part of the work.

Slightly fewer than half of advisers (48%) agreed with the statement, “DC plan clients often ask me about IRA rollover decisions,” while 24% strongly agreed. One-third of advisers (33%) agreed that, “IRAs are a better vehicle to implement retirement income strategies,” and 18% strongly agreed.

Some advisers, however, expressed concern regarding the fiduciary liability that can accompany rollovers. 26% agreed and 5% strongly agreed that fiduciary issues in advising on which IRA to roll into is a factor in the discussions. Concerns could be driven by increased regulatory scrutiny of plan-to-IRA transactions, according to the Cerulli research.

Regulations that might be top of mind for advisers include the Department of Labor’s Prohibited Transaction Exemption 2020-02 that took effect in June 2022, according to Cerulli. PTE 2020-02 lays out several requirements for providing fiduciary investment advice, including advice to roll over a retirement plan account into an individual retirement account.