Nuts & Bolts: Best Practices in Target-Date-Fund Selection

As retirement planning evolves, target-date funds have become central to many workplace retirement plans. However, the process of selecting the right TDF is far from straightforward.  

As plan advisers share below, the basics of TDF assessment are important when guiding plan sponsors. Those can include assessing the fund’s glide path, the fees and the specific needs of the plan, based on participant demographics. But more recently, innovations in TDF products must also be considered, such as automated adjustments to the markets and the potential to better customize glide paths through personalization.  

Understanding the Glide Path 

One of the first steps in TDF selection is determining the glide path—the allocation of equities versus fixed income over the life of the fund. According to Loraine Montanye, senior retirement plan advisor at DBR & Co., the glide path must align with participant demographics and behaviors, such as deferral rates, compensation structures and how long retirees typically keep their assets in the plan. 

The choice between a “to” fund or a “through” fund is another crucial factor. Montanye notes that participants who retire later or keep assets in the plan longer may benefit from “through” funds, which continue to manage investments post-retirement. In contrast, “to” funds level out equity allocations at retirement, rolling into an income fund for stability. 

The debate between active and passive fund management also continues to shape investment strategies. Montanye says the decision often depends on the broader investment lineup and participant demographics. 

Passive funds, with lower fees, are fitting when plans already offer other active asset allocation options, like conservative or balanced funds, she says. Whereas active management can be ideal for areas such as fixed income, where skilled managers often deliver better results for retirees. 

“It’s always a huge debate in the industry: active versus passive,” Montanye says. “Our firm believes that there’s room for both.” 

American Funds of Capital Group, traditionally an active manager, announced in 2024 its first hybrid TDF blending both active and passive strategies. The firm noted in the product release that it made the move in part to meet plan sponsor demand for passive strategies. 

Fiduciary Considerations 

Advisers also continue to underscore the importance of fiduciary responsibility in TDF selection. Montanye suggests that advisers steer plan sponsors away from basing their decisions solely on cost or discounts from recordkeepers.  

“Being a fiduciary, make sure that your desire to monitor reasonable expense does not impede your ability to process your investment selection and most plans,” she says, adding that most plan assets are typically in TDFs, so sponsors can be held liable if their due diligence does not go beyond surface-level considerations. 

Chris DeAndrea, director of retirement plan consulting at Webber Advisors, adds that a solid investment policy statement that caters to a plan sponsor’s needs provides essential guidance. The process involves comparing performance, risk and fees, as well as qualitative factors like fund composition and manager strategy, against peers.  

“That protects yourselves. It protects the plan,” he says. “So we do have language and guidance going into our investment policy statement.” 

Bruce Lanser, first vice president of wealth management at UBS, highlights the importance of incorporating detailed language in policy statements to guide committees on the selection of qualified default investment alternatives. These statements, he advises, should address withdrawal patterns and the rationale behind choosing specific funds, whether managed “to” or “through” retirement with varying equity exposures. 

Lanser adds that many advisers are overly focused on performance and fees when evaluating target-date funds, neglecting critical factors like risk levels and volatility. He emphasizes that these overlooked components play a significant role in participants’ ability to accumulate assets effectively. 

Customization and Automation 

The TDF providers, however, are not sitting still. A significant trend in TDFs is increased customization. Adviser DeAndrea explains that traditional age-based TDFs, while practical, are being challenged by personalized solutions that account for participants’ external investments, risk tolerance and financial goals. 

“Plan sponsors are starting to understand that more and look for some of the customized solutions that we can offer as well, in addition to just the traditional target-dates that might be still available in the plan,” says DeAndrea. 

Even traditional TDF providers are adapting, he says, enhancing their glide paths and fund structures to meet the demand for greater flexibility by adjusting to the markets and participant portfolios.  

Asset manager PIMCO has an investment option called myTDF that seeks to customize allocation to a participant’s needs. Earlier this year, T. Rowe Price announced Personalized Retirement Manager, which flips a participant around middle age to a more customized investment allocation built on T. Rowe’s TDF allocation strategies.  

Along with customization, automation is becoming more prevalent. While automated tools play a growing role in TDF analysis, DeAndrea stressed that human expertise remains vital. These tools generate reports and score TDFs against various criteria, but final recommendations depend on deeper analysis and conversations. 

“There is automation providing me that list of appropriate options,” he says. “But I’m going to come up with my own analysis from my own experience and my meetings from those investment companies.” 

Looking to the Future 

Lanser notes, in terms of the future, that the industry is also headed toward including lifetime income options in TDFs. 

“I think that’ll become the predominant vehicle within QDA, within the target-date fund,” he says. 

He pointed to the growing trend of embedding annuity options into TDFs to ensure income sustainability for retirees, such as BlackRock Inc.’s program that integrates income solutions within its TDFs. BlackRock recently announced it had made that offering the QDIA for its own U.S. employee base of about 8,500 employees. 

“We’re at early stages of providers, whether recordkeepers or asset managers, rushing the market with their solutions, and they’re getting broader acceptance,” Lanser says.  

Finally, Lanser recommends advisers keep in mind that when selecting the right TDFs for a plan, the goal is to provide retirement income, not just deliver performance. 

“This is the one retirement vehicle, the one fund they have for retirement,” he says. “You need to take a broader perspective on what fund, how it’s structured, what’s delivering and when it’s delivering it for participants.”