How TDFs Are Evolving

Personalizing glide paths by drawing on data from recordkeepers may help lead to better participant outcomes.

Target-date funds have become the go-to retirement savings vehicle for most Americans. After being named a qualified default investment alternative by the passage of the Pension Protection Act in 2006, the investment vehicles have only grown in popularity, hitting a record high of $3.47 trillion in 2023.

TDFs gained their status as the de facto investment vehicle for good reason: Their simple “set it and forget it” approach adjusts participants’ risk portfolios over time based on a targeted retirement date. But recently, they’ve been getting a makeover.

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More and more fund providers are launching personalized takes on the TDF, hoping to satisfy participants’ growing desire for products that meet their specific retirement needs.

“Personalization has become more needed in the marketplace and delivered much more efficiently given how technology has progressed over the years,” says Brett Fisher, head of investment product strategy at Principal Financial Group.

The Personalized Approach

While TDFs have been lauded for simplicity, it’s also their greatest knock: They offer people of the same age the same asset allocation without taking into account the differences in participants’ financial situations and goals.

“Two people with the same age can have very different circumstances in terms of how much they’re ready for your retirement, how much they’ve saved, how much they contribute to the plan and how long until they plan to retire,” says Rene Martel, head of retirement at PIMCO.

One solution the marketplace came up with is managed accounts, which continue to gain traction. But that solution also tends to come at a higher cost than TDFs and work best with participant engagement.

There’s a lot of “white space” for customization between the traditional TDF and a managed account, Martel says. PIMCO is trying to fill that space by offering personalization without the high costs or need for participant engagement via its personalized TDF, which uses data from recordkeepers— such as participants’ balances, contributions and employer matches—to create a glide path specific to each participant instead of one based on national averages.

“It might not get you as much customization as managed accounts because there is more information you can provide if you engage… but maybe you get 80% of the way there in terms of the benefit of personalization,” Martel says.

Evolving Personalization 

Principal has been offering TDFs since 2001. But as demands have changed, so have its offerings. Fisher says that when you think of personalization in the TDF space, you tend to think of a custom TDF for a very large plan—and while Principal does offer that, it’s also focused on giving participants their own customized glide paths.

In the first quarter of 2025, the provider will launch Principal Personalized Target Date, which will use Principal’s existing relationship with Morningstar as an advice engine provider. The advice engine will be applied to Principal’s proprietary target-dates and its co-manufactured offerings so a plan sponsor will adopt that Principal target-fund fund as their plan’s QDIA. Through that investment, a participant will have multiple data points fed through the advice engine—including any nonqualified balances or a defined benefit balance—to get a recommendation on how they should allocate between the different target-date vintages in that series.

Capital Group, meanwhile, has a personalized target-date solution called Target Date Plus, which is also powered by Morningstar to create glide paths based on five data points from the recordkeeper: age, account balance, income, employer contribution and employee contribution. In September, T. Rowe Price introduced Personalized Retirement Manager, a customized investment allocation built on its TDF asset allocation methodology with Morningstar. Vanguard also continues to consider further customizations to its TDF series, most recently with an additional opt-in landing point for its glide path that contains a slightly higher equity allocation.

“That was really a recognition that investors in a plan usually have a pretty wide range of different needs and circumstances,” Brian Miller, a senior investment specialist and head of TDF product management at Vanguard, told Planadviser in September. “We wanted to have plan participants—and plans in general—have the ability to have two different landing points, depending on those individual needs.”

Looking Forward

Will personalization replace the single-glide path solution? Craig Duglin, senior vice president of product management at Capital Group, doesn’t think so. But he believes there will be adoption of more personalized solutions.

“There’s a real efficiency to how we and a couple others have developed the target-date solutions and it’s just a really good default,” Duglin says. “Maybe personalization will remain as an opt-in.”

As technology evolves, so will the customization of TDFs.

“Right now, the personalization engine is going to pull what’s available on the recordkeeper’s database and there’s a set of five or six factors that are pretty common,” Martel says. “But over time, with technology becoming better, we’re hoping there is going to be more that becomes available.”

The ability to customize will open the door for other changes to TDFs in the future, Martel adds, such as more TDFs incorporating annuities into their design. We will also continue to see the evolution of partnerships between recordkeepers that store the data and providers.

“Ten years ago we probably wouldn’t have been able to facilitate the use of that data into a more personalized solution,” Martel says. “Now effectively we’re moving [from] a world where there was one glide path for everybody to a world where there might be thousands of glide paths into a single plan.”

More on this topic:

Beyond TDFs
Nuts & Bolts: Best Practices in Target-Date-Fund Selection
Catching Up With PIMCO’s Personalized Target-Date Funds
Q&A: Seeking a More Perfect TDF
TDFs With Annuity Options Set to Proliferate

Beyond TDFs

A look at some of the leading defined contribution investment solutions competing with target date funds.

Target-date funds are the undeniable leaders in the retirement saving industry. As the default investment vehicle for most employees with defined contribution plans, TDFs have surged in popularity over the years.

“Target-date funds have been very effective as a way to get millions of participants a professionally-managed portfolio that’s based upon their age,” says David Blanchett, head of retirement research for PGIM DC Solutions.

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But looking forward, the optimal portfolio probably isn’t the exact same for everyone that’s within a five-year age cohort.

“We’re going to continue to see other professionally-managed solutions emerge as possibilities,” Blanchett says.

Solutions will range from investment options with a long track record, such as stable value funds, to newer solutions, such as adviser managed accounts. Which solutions gain the most market share, however, will depend on the demand and use they get from plan advisers and sponsors.

Risk-Based or Balanced Funds

Just 27% of defined contribution plans offer risk-based or balanced funds, which compares to 97% that offer TDFs, according to NEPC’s 2023 DC survey on plan trends and fees. The percentage of balanced funds continues to go down over time, and most of those that offer risk-based funds are doing so in addition to offering TDFs, says Mikaylee O’Connor, principal and head of defined contribution solutions at investment consulting firm NEPC. In other words, risk-based funds are not necessarily a worthy rival to TDFs.

The main reason balanced funds are losing ground is that when you look at the investment menu design, the trend has been to streamline, providing less choice but broader investment options to participants, O’Connor says. TDFs have more benefits than balanced funds because they include the de-risking component over time.

“A lot of committees are saying, ‘Well, these are somewhat redundant,’” O’Connor says. “They’re essentially removing the balanced fund and mapping those assets to the TDF.”

However, one area in which she says risk-based funds could see a reemergence is in the retirement income space. While today’s TDFs have a single income vintage, there may be a market for multiple income vintages that span the risk-return spectrum to offer more tailored options for retirees, O’Connor says.

Managed Accounts

Managed accounts personalize allocations for participants more than TDFs can—and they are where the industry looks poised to eventually evolve to, Blanchett says.

“Managed accounts consist of further adding on additional layers of portfolios that can be calibrated to not only the plan information but also each participant,” he adds. “It’s taking into account what we know about that person and then further personalizing the portfolio based on their situation.”

NEPC’s data shows that 43% of defined contribution plans offer managed accounts. But these accounts’ biggest hurdle is the current fee model.

“What we would like to see and what we have been talking to the market about is a managed account solution that’s implemented at a lower fee for less engaged participants,” O’Connor says.

For instance, providers could offer an entry-level option that could be structured as the default, replacing the TDF, then more engaged participants could access additional services and potentially expanded investment options through a tiered subscription offering.

“This approach could cater to flexibility in costs and features while still catering to a diverse participant need and differing engagement levels,” O’Connor adds. While this type of offering isn’t available now, she says if it was available, it could give managed accounts the potential to gain more ground on TDFs.

Stable Value Funds

Stable value funds have been around since the inception of defined contribution plans, and they haven’t changed much in recent years. They’re designed to provide steady returns regardless of the market environment and have accumulated $856 billion in assets under management as of mid-year 2024, according to data from the Stable Value Investment Association (SVIA), making up roughly 10% of all retirement assets.

While there used to be a competition between stable value funds and TDFs for qualified default investment alternative status, nowadays they’re seen more as partners, says Zach Gieske, president of SVIA. Participants may invest in TDFs when they’re younger, and then transition into stable value funds once they hit age 50. And stable value is often used within custom target-date structures to provide a better risk-return profile, he adds.

 “Even in the decumulation phase, there is space for both to work well together,” Gieske says.

Adviser-Managed Accounts

With adviser-managed accounts, an individual adviser uses a recordkeeper’s technology and infrastructure, but controls the investment part of the account, such as the pricing and branding. O’Connor says this type of solution is gaining traction as a replacement to TDFs in the pooled employer plan space for small plans.

“It’s a way for the advisor to essentially make more money,” she explains.

The default is a managed account, and the adviser can have a say in terms of the investing approach.

“It’s hard to wrap an adviser fee on a TDF,” O’Connor says. “They can wrap a fee on the whole plan, but an adviser can provide additional services to these participants within the smaller plans.”

She added that they haven’t seen this trend pick up among larger plans.

While plan sponsors seem overwhelmingly happy with TDFs, there may be transition in the years to come.

“We’re at an inflection point with the ability to leverage technology and use it within the DC system,” says O’Connor. “There’s so much potential out there, it’s just [about] how fast the DC space will actually move.”

More on this topic:

How TDFs Are Evolving
Nuts & Bolts: Best Practices in Target-Date-Fund Selection
Catching Up With PIMCO’s Personalized Target-Date Funds
Q&A: Seeking a More Perfect TDF
TDFs With Annuity Options Set to Proliferate

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