Target-date funds have been a boon to plan sponsors because they can be simple, relatively cost-effective options to help employees save for retirement. Once a target-date series has been selected, it’s easy for the employee to get invested in an appropriate fund without worrying about complex investment decisions.
When Choosing Target-date Funds Gets Tough
Choosing that proper target-date series is where a sponsor can get tripped up. There’s a tendency to focus on tangible items such as cost and whether the fund favors active or passive management, while overlooking less obvious characteristics such as how the glide path—the adjustment to the equity allocation over time—has been designed and whether that is suitable for the plan’s participants.
Acknowledging the Easy Option
For many plan sponsors, selecting target-date funds has been as simple as accepting their recordkeeper’s target-date product. A 2015 study by CapTrust Advisors found that 45% of plan sponsors used the series of target-date funds offered by their recordkeepers. In fact, six of the 10 largest recordkeepers are also the largest providers of target-date products—a surprising statistic given the number of products available to plans.1
Is Price > Suitability?
Focusing on price over suitability can lead to a potential mismatch between the equity glide path of the fund, and the glide path that would work best for the specific demographics of the plan participants. So no, price does not unanimously trump suitability.
Glide path appropriateness is one of the most important aspects of selecting the most appropriate target-date funds for your population. Above all, consider quantitative frameworks and put participants first as you navigate selection for your plan.