Magazine

UpFront | Published in March 2017

Look Carefully ‘Under the Hood’ of TDFs

By PLANSPONSOR staff | March 2017
A new issue brief from the Center for Retirement Research (CRR) at Boston College takes a “look under the hood” of the target-date fund (TDF) market, finding, in broad terms, that TDFs remain one of the most sensible investing approaches for plan sponsors to offer their participants.

The benefits of TDFs are well-known, CRR researchers argue. The funds help otherwise novice individual investors to access specialized assets in a way that rationally complements conventional stocks and bonds—and, for this benefit, TDF fees are only modestly higher than if an investor assembled a similar portfolio on his own. Beyond this, CRR found that TDF investment returns are “broadly in line with other mutual funds” net of fees.

Still, the analysis contends, plan sponsors absolutely must pick their managers carefully and make a real effort to control costs—and they must make sure their overall investing convictions match those of the manager. TDF manager decisions on market timing and fund additions do not always end up helping performance or matching the preferred investing style of a given investor in that manager’s fund, CRR observes.

“At the broadest level, each TDF has a glide path that specifies the percentage in equities and bonds over time,” the research lays out. “The bulk of the sample funds with a target date of 2035 held 70% to 85% in equities in 2011. But a quarter of the funds held equity shares either above or below this range. … Interestingly, looking under the hood shows that most TDFs are not the simple mix of equities and bonds that many envision.”

CRR found that the “typical TDF” invests in 17 funds on average. “These holdings include emerging markets, real estate and commodities,” the analysis says. “And the prevalence of these specialized assets has increased over time.”

Percentage of TDFs Holding Selected Specialized Funds, 2011

76%
22%
53%
36%
40%
Emerging
market equity
Emerging
market debt
Domestic
real estate
International
real estate
Commodities
Source: Center for Retirement Research (CRR)

Percentage of Recently Hired 401(k) Participants With a TDF Fund

28%
34%
44%
48%
48%
55%
57%
56%
59%
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Center for Retirement Research (CRR)

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