Retirement

The Challenge of Choosing Target-Date Funds

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.

 

Download Target-Date Funds Decision White Paper

1 http://www.captrustadvisors.com/resources/institutional-consulting/passive-and-target-date-trends-in-defined-contribution-plans/

Lacey is the team lead focused on B2B demand generation for Morningstar’s growing Workplace segment. This includes responsibility of marketing strategy and execution with plan sponsors and key providers to expand Morningstar’s market reach. The Workplace umbrella includes financial wellness and retirement products for employees as well as custom models and fiduciary services. With products, services and thoughtful marketing, we strive to empower companies to help employees build financial wellness today and get ready to retire when the time comes.

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