PANC 2017: Measuring TDF Performance

The second day of the 2017 PLANADVISER National Conference in Orlando featured an extensive conversation on the difficult topic of measuring target-date fund (TDF) performance.

Including the moderator, the panel discussion featured a team of five retirement plan industry veterans: Brooks Herman, vice president, data and research, Strategic Insight; Joe Szalay, vice president for defined contribution (DC) investment strategy, BlackRock; Todd Leszczynski, managing director, MFS; Derek Young, head of investment client strategy, vice chairman, Fidelity Institutional Asset Management; and Todd Lacey, chief business development officer, Stadion Money Management.

As the panel laid out, passive strategies now account for 42% of the entire TDF market, compared with 27% in 2009. This growth in passive approaches is coming from large and jumbo plans looking to reduce fees, mainly, but it also extends into the midsize and smaller DC plan market. The panelists voiced some concern about this fast growth and questioned whether plan sponsors understand what could happen to passive TDFs during a sharp market downturn.

Alongside the trend of a strong shift toward passive management, the use of collective investment trusts (CITs) as a means of target-date investing continues to grow, with 52% of net TDF assets now invested through this type of vehicle. There is also some emerging evidence that the use of exchange-traded funds as the basis for target-date portfolios is increasing, though far more slowly than that of CITs.

The panelists all agreed that, while TDFs are known for their simplicity of use, this is something of a mischaracterization. It is true TDFs are relatively easy to use from the participant perspective, but there is a significant amount of preliminary and ongoing analysis required of the plan sponsor and the adviser to ensure the appropriate TDF strategy is put in place. Some of the panelists seemed to favor the approach of offering multiple glide paths to a given plan population within the same target-date product family, while others were more comfortable with the idea of finding a single, middle-ground glide path for the plan population. In either case, the panelists agreed that the adviser has a crucial role to play in helping sponsors identify, consider and ultimately select the best TDF approach for their plan.

Important to note, the panelists mainly agreed that the only trend that may slow the growth in TDFs would be growth in managed accounts. They stressed that there is an emerging conversation about pairing TDFs and managed accounts together on the plan menu to serve people with simpler needs vs. those with more specific, individual needs. The idea is that a newly employed 25-year-old with his first DC account probably will be better served by a TDF, whereas older workers with greater amounts of retirement savings could be better served by managed accounts.

Other topics that were broached during the panel discussion included the unfortunate fact that many plan sponsors utilizing passive target-date funds believe that doing so absolves them of fiduciary responsibility—a completely inaccurate assumption that advisers should combat. Further, the panelists considered the relative importance of screening the target-date fund as a whole compared with screening the individual investments built into that TDF. Especially when proprietary options are being used, there may be investments within the TDF series that would not necessarily pass a plan sponsor’s scrutiny were they considered on their own as stand-alone options for the core menu.