Target-Date Fund Market Needs Benchmark

Plan sponsors are confronted with a bewildering array of target-date funds - but lack a generally accepted benchmark for the popular product category.

Recognizing this, in the December issue of the Cerulli Edge newsletter, Cerulli Associates asserts that players in the target-date market vying for plan sponsors’ attention will have to distinguish themselves more on the nature of how the asset allocation funds change over time – their “glide path.”

“Because of the unique target-date-based investment strategy of these funds, as well as the absence of a long-term track record among many of the newer target-date/lifecycle funds, competitors are waging positioning wars,” Cerulli researchers said. “While fees are somewhat of a competitive differentiator, the central debate is over which manager has constructed the preeminent glide path.”

Underlying the glide path debate, Cerulli claims, is a discussion about:

  • strategic versus tactical asset allocation,
  • active versus passive management, and
  • the merits and drawbacks of multi-managed portfolios.

Even with the glide path uncertainty, Cerulli maintains, there is a truth plan sponsors and the asset managers from which they get their investment options should not lose sight of – that the industry will still eventually have to develop a benchmark by which their products can be evaluated. “The importance of this issue cannot be downplayed, as these funds may ultimately represent the sole or largest source of retirement income funding for many investors, as they are able to rely less on Social Security, proceeds from appreciated home/real estate, and defined benefit (DB) plans,” Cerulli said in the article.

Plan sponsors should not accept and asset managers should not put out into the market anything less than a carefully deliberated series of decisions about how target-date products should be built. “Cerulli contends that the glide paths that will be most attractive to sponsors and other pro buyers will be those developed in organizations that place intellectual rigor ahead of quick fixes,” the researchers concluded.

Finally, plan sponsors should not buy into claims by some target-date fund creators’ for potential results in helping participants reach and comfortably live through their retirement since, as Cerulli points out, many important influences such as participant savings behavior and the participant’s ultimate health will affect the ultimate size of their savings nest egg.

“If an investor is laid off from their job, becomes incapacitated in some way, or experiences some other disruption to their income stream, there may be profound implications for their retirement plan,’ Cerulli noted.