Dynamically Managed TDFs Paired With Higher Deferrals Equals Superior Results

GMO looked at the performance of various TDF factors over a 40-year period to help guide TDF selection.

By Lee Barney | March 07, 2017
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GMO took a look at several variables retirement plan advisers and sponsors can consider when selecting a target-date fund—such as active versus passive, level of risk, dynamic versus predetermined glidepaths and custom versus off-the shelf—and how these factors would have resulted in outcomes for the 40-year period between 1975 and 2015.

Other factors that GMO looked at included: proprietary underlying funds versus open architecture, traditional versus alternative investments, “to retirement” versus “through,” and auto escalation versus not.

In “Target Date Decisions, Decisions … Getting the Biggest Bang for the Buck,” GMO concludes that dynamic allocations paired with higher-than-typical deferral rates can result in significantly better outcomes for participants—and that these are the two most important factors that sponsors and advisers should consider when selecting a TDF and the plan design around it.

GMO also found that passively managed investments should be included in TDFs, noting in its white paper, “It is clear from the scoreboard that active management across this [40-year] time frame did not add value. The takeaway: Plan sponsors should not obsess about open-architecture active frameworks.”

NEXT: What level of risk should a TDF take?