The Debate Rages On

The appealing idea of a “set it and forget it” strategy was made only more attractive by the endorsement of these funds as a qualified default investment alternative (QDIA) by the Department of Labor (DOL) after the passage of the Pension Protection Act of 2006 (PPA).

However, while the idea behind all these funds is the same, in that they allocate based on a glide path by investing in various asset classes that become more conservative over the course of time, their outcomes may vary widely as every investment management firm has its own unique approach. Each such approach is typically discussed and justified by a research report put out by the company to reveal what it found about participant behavior, markets and risks, and how those factors have been integrated into its strategy.

One of the issues raised most often when comparing target-date fund suites concerns the composition of the fund when it hits the “date” in the name—e.g., the asset allocation in the year 2020 for a 2020 fund. As an industry, we have taken to calling this the “to” vs. “through” debate. Does the fund manager stop changing allocations at that date—to—or continue the glide path after—through—and come to rest at some later date?

There appears to be no right answer. In fact, in mid-May, two fund managers released competing research reports about TDFs. One day, BlackRock put out research saying that a “to” retirement date fund is superior, followed just days later by a Fidelity report that claims “through” is the better approach. Is it any surprise that those findings mirror the strategies of their respective fund families?

The more I read the research of each investment manager, the more I’ve come to believe that there is truly no “right answer” for everyone. On the one hand, I’d say that any target-date fund is a good answer, in that it is better for the average participant to be invested in pretty much any target-date fund than to be going it on his own.

On the other hand, it is impossible to create a one-size-fits-all solution—whether to or through—because no matter what average of participant behavior or risk you use, it is still an average, so half the people will be above that behavioral standard and the other half will be below—and that’s when looking at a plan participant investing in the funds. When looking at recommending a fund suite to plan sponsors, or evaluating the set of TDFs currently in the lineup, you have to evaluate the right fit for the plan. On that point, I think the Department of Labor is completely correct.

Take, for example, a plan that might exist at a young firm—in Silicon Valley, perhaps—from which no one has ever retired. It’s unlikely you would suggest the same fund suite for that firm’s plan as for a plan filled with Baby Boomers looking to retire in the next 10 years. However, what if, in conversation with the adviser, the sponsor of the plan filled with young participants knew its population wanted to retire early or that the population had other “risky” assets, say, in stock? Would you then reconsider your initial recommendation? Conversely, if the plan with Boomers had the 401(k) as a truly supplemental option next to a comprehensive defined benefit (DB) plan, might you advise that company to allow for a little more equity even as they approach retirement?

The upside of all this? There is a target-date fund option for everyone. The potential challenge? It’s a lot of work to figure out which is the right fit for a plan—and its distinctive group of participants. However, get it right, and you’ve added a lot of value, quite literally, to the plan and to addressing participants’ retirement needs.