In Practice January 1, 2025

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

Industry experts discuss key considerations when picking the right TDFs for a plan.
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Art by Irene Servillo

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.  

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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.” 

More on this topic:

How TDFs Are Evolving
Beyond TDFs
Catching Up With PIMCO’s Personalized Target-Date Funds
Q&A: Seeking a More Perfect TDF
TDFs With Annuity Options Set to Proliferate
Client Service December 2, 2024

Moving Beyond SECURE 2.0

Retirement plan advisers discuss how they’re wrapping up 2024 with clients and preparing for the year ahead.
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Art by Ryan Davis

Chuck Williams, founder, CEO and senior consultant at Finspire LLC, says he and his team are finally in a position to stop focusing on provisions from the SECURE 2.0 Act of 2022 in favor of more personalized plan services.

“We spent a lot of time on SECURE 2.0 this year with the goal of putting that behind us so we can stop talking about it,” Williams says.

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Finspire may be rare among advisories in being ready to move beyond SECURE 2.0. But it is not different in its plans to work closely with clients on the year ahead, with focus areas ranging from firming up retirement plan committee procedures and processes to discussing the market implications of this year’s elections to considering trending areas of plan litigation against which clients must guard.

No matter what 2025 brings, it’s clear it will be a busy one for advisers, as they navigate numerous and shifting demands from clients, courts, regulators and policymakers.

Improving Efficiency

Williams, of Finspire, says his team worked with clients to “really tackle SECURE 2.0” in 2024 to set up any mandatory provisions, such as the higher-earner Roth catch-up contributions that start in January 2026. That work led to Finspire focusing on one of two areas with clients in Q4, depending on their needs: improving retirement plan committee efficiencies or diving deep into employee outcomes.

To improve efficiency, the team might consider the retirement plan committee structure, timing and impact of meetings, or consider whether the sponsor should leverage a 3(16) or 3(38) fiduciary structure. This area has been particularly important for businesses going through mergers and acquisitions, says Williams, as that was a more common occurrence in 2024.

If a client wants to focus on its participants, Williams says Finspire will dive into the data to consider what is working and what isn’t. Those findings may lead to discussions about ancillary savings plans, retirement income options or financial wellness programs.

“We do an analysis of where they are today to see if the data tell us something is broken or can be improved,” Williams says. “We’re looking at the overall health of the plan, the participant rate and seeing if it aligns with your culture and goals.”

3 Prongs

Joe DeBello, a vice president and financial adviser at CAPTRUST, sees three key themes for clients as 2024 comes to close.

The first are questions and conversations arising from the U.S. presidential and congressional elections and what the results mean for the broader economy and investing. Those conversations may include what inflation would mean for participants in the plan or how a recession, rather than an economic soft landing, would impact them.

“More often, in these types of years [with major elections], there are a lot more questions about policy, the economy and what the future may hold from a markets perspective,” DeBello says.

A second area DeBello sees as a focus, at least for some plan sponsors, is the start of implementing optional SECURE 2.0 provisions such, as the student loan matching benefit or in-plan income options.

“We have gotten beyond the feeling-out phase of what is coming, and we’re starting to see real-world examples of employers implementing some of the optional provisions,” he says.

Finally, DeBello believes 2024 brought an even greater focus on governance and fiduciary issues. This focus comes, in part, as lawsuits continue about the use of plan forfeitures and decisions on plan default settings.

“As students of the game, so to speak, we take the approach that the best defense is a good offense,” DeBello says. “Whether right or wrong, warranted or unwarranted, we want our clients to always be following best practices and visiting and revisiting policies and procedures.”

Benefits to Wealth

Christian Mango, the national practice leader for the Alera Group’s retirement plan services division, said he believes 2025 will see continued merging of employee benefits and wealth management for individuals.

“The plan sponsors don’t want to be hearing from separate lines of business anymore,” Mango says. “They want to hear from us as one voice so they are getting services in a unified way.”

Mango says some of this connection will come from strong benefits programs that include an engaging and impactful financial wellness program for participants. He notes that some programs have a bad reputation in the market for not producing better outcomes, but some are working well to get participants the tools and services they need.

In November, Alera announced its own financial services offering in partnership with TIFIN @Work, called FinWell Connect, which uses artificial intelligence in its workplace benefits and wealth management services.

Mango says another theme of 2025 will be retirement and benefits partnerships, as firms look to leverage scale and expertise in mutually beneficial ways. He believes the fee compression that has affected everyone from recordkeepers to advisers to asset managers may risk eroding services, and partnerships such as Alera’s with TIFIN @Work will help create better solutions.

“We’ve done this [fee compression] to ourselves, largely,” he says. “We have to stop. We have to really show what our value is to the plan sponsor clients. … When you look at a good client service model, it’s so important for those participants on a daily basis, a quarterly basis—and we need to make sure that we are telling that story to the client and to the market as a whole.”

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