PANC 2021: The great TDF debate: Prudence vs. Performance


Comparing the “quality” of Target Date Funds (TDFs) is not easy. Plan advisors and plan sponsors must decide how to prioritize return, risk, and many other factors when making a prudent investment decision. This is all the more important as TDFs have become the Qualified Default Investment Alternative (QDIA) for the majority of plan sponsors.

During the opening session of the National Virtual PLANADVISER (PANC) 2021 Conference, Jamie Bentley, Executive Vice President, Retirement Sales, PIMCO, said it’s helpful to examine why TDFs have been the big winner: they are an easy way for participants to achieve diversification, and they do not require any commitment from the participants.

Richard Weiss, senior vice president, chief investment officer (CIO), multi-asset strategies and senior portfolio manager at American Century Investments, said there is no doubt that the TDF market is maturing. But, while most plans have TDFs like QDIA, he says assets under management (AUM) for investments have yet to peak.

“Plan sponsors are re-enrolling, and there is increased education and awareness of TDFs,” he said. “The ease of use, good performance and low costs strongly favor TDF over other solutions. “

Jon Nolan, senior research analyst, Francis Investment Counsel, said two-thirds of plans automatically enroll participants in TDFs.

Dan Bruns, head of managed solutions, Morningstar Investment Management, said no one can dispute the success of TDFs: 80-90% of plans use them and most of the participants’ assets are transferred to them. They also helped the participants achieve better results.

However, he said he wondered if this was going to continue or if it was time to disrupt. “I would say TDF hasn’t materially changed a lot,” Bruns said. “We’ve seen the fees go down, we’ve seen the passive / active mix, but overall the products are now similar to products from years ago.” But, he added, as plan sponsors move towards greater personalization in other perks like financial well-being and plan members want a more personalized experience, there will be a shift towards more personalization in TDFs.

“We are seeing a small innovation, such as dynamic QDIAs that combine TDFs with more personalized managed accounts,” Bruns said. “I don’t know if this will become a dominant choice, but we see a movement towards it, so it will be more prevalent on the road.”

Bentley said there hasn’t been much evolution in the TDF space, but the industry is ready for some changes. “We think personalization will be that change,” Bentley said. “There are other data elements beyond age captured by record keeping systems that can be provided without requiring participant engagement. “

Caution versus performance

Weiss said the performance review is part of a careful selection process for TDFS; however, the ultimate goal of TDF strategies is to minimize longevity risk, that is, the risk of running out of assets in retirement.

“No goal is the best for a TDF. This is why the DOL [Department of Labor] recommends examining adequacy, ”he said. “We see it as an advisory job to help plan sponsors match the right TDF strategy to their plans.

“In normal market times, the dispersion of performance between TDFs is minor, but in times of volatility, the dispersion explodes. It separates the weak from the strong, ”Weiss continued.

Bruns noted that there are very different performance among TDFs depending on the descent path design and different management philosophies. He said it’s important for advisors to understand the products they are recommending to clients of plan sponsors.

When selecting QDIAs, plan sponsors should look for performance, but should also consider protecting member assets, Nolan said.

“It always comes down to performance; plan sponsors need to make sure they choose options that outperform most of the time, ”he said. “But before looking at performance, we have conversations with customers about suitability. What is the plan sponsor trying to accomplish for the members? What would the plan sponsor prefer members to do in retirement: stay in the plan or take their money? These elements are really important when selecting TDFs.

Nolan added that it is important to look at the demographics of the plan. For example, if participants have access to an open defined benefit (DB) plan, they may not need to take as much equity risk.

“Even without a DB plan, there are big differences in employee cohorts,” Bruns noted. “For example, there is a difference between medical practices and blue collar industries. We have better paid employees, higher retirement balances and higher savings rates. A descent path would be different from the other way around.

He suggested that based on relevance, plan sponsors and advisers should review performance and determine if an FTD is being managed appropriately over time. “Looking at fit first will result in greater employee adherence and better retirement success, which is more important than a few better performance points and a few basis points. [bps] lower fees, ”Bruns said.

He added that measuring retirement readiness would be helpful in determining whether TDF is suitable for participants.

Bentley said that PIMCO’s annual survey of consultants finds that about 74% of plans overseen by consultants prefer or actively seek to keep participants’ assets in the plan after they retire.

Nolan said that when members stay in the plan, it helps create economies of scale that reduce costs and allow retirees to receive education and counseling.

“If you want to come back hunting and wait 40 years, TDF will probably end up in the lead,” Bentley said. “But individuals have different entry and exit points that plan sponsors should be aware of.”

As an example, Bentley said that the US stock market is around 56% of the global stock market, but TDFs own around 65% of US stocks because they outperform in the short term. He noted, however, that there may be less dispersion in performance between US stocks and non-US stocks over the longer term. So as participants reap the benefits of short-term performance, Bentley asked how they would fare in the longer term.

Bentley also noted that many TDFs are developed for the “average” participant, using data from the Employee Benefit Research Institute (EBRI) or other participant information. Some plan sponsors use personalized TDFs, but many don’t have the expertise or the money to do so, which is why data is important to make more personalization available in TDFs without disrupting ease of use. . “If we can customize TDFs on an individual level, that solves the problem of fit,” Bentley said.

Weiss noted that plan demographics and the attitudes of plan sponsors and participants at risk may change over time, such that some plan sponsors modify TDFs due to a change in the suitability of their plans. . Nolan said any TDF selected by a plan sponsor would not be suitable all participants, but they should try to do their best to more participants.

“If we do an initial suitability analysis, it’s easier to talk to plan sponsors about the consideration of risk,” Nolan said. “Participants do not have an idea of ​​the level of risk embedded in TDF strategies. Plan sponsors should not only look at returns, but risk-adjusted returns. And they need to understand that the market will go down sometimes, so what risk will be detrimental to participants?

Nolan said most of the TDF analysis tools his company sees come from TDF vendors, so there is a bit of skepticism about their product orientation. Bruns noted that Morningstar has a TDF analysis tool.


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