Debate has long raged over a target-date fund’s role in the portfolio, and whether including other products reduces the effectiveness of the retirement plan overall.
David Blanchett, Morningstar’s head of retirement research, appears to have the answer.
“There are potentially over 10 million participants in defined contribution plans today combining a target-date fund with other plan investments, commonly referred to as ‘mixed target-date fund investors,’” Blanchett writes in a recent research report titled, “Mixed Target-Date Fund Investors: Is There a Method to the Madness?”
“Target-date funds are best used as an ‘all or none’ investment option since mixing target-date funds with other plan investments significantly diminishes, and potentially eliminates, their value,” he adds.
Blanchett argues that participants that require a more-aggressive allocation are “better off moving along the target-date fund glide path” to a year with a higher risk level, rather than mixing in other equity or bond funds.
Participant profile
The typical mixed target-date fund investor, they have attributes that would suggest “they are more sophisticated than investors who use the default investment (for example, they have higher salaries and higher balances), but less sophisticated than participants self-directing their accounts and not using target-date funds.”
Other findings include:
Overall, mixed target-date fund investors appear to have relatively diversified portfolios, but are more aggressive than the average target-date fund would be for a given age, especially at older ages.
The average allocation of mixed target-date fund investors is 37% target-date funds, 49% equity funds, and 13% bond funds. The non-target-date fund weights are relatively constant across different levels of target-date fund holdings.
Plan sponsors should encourage participants who are not interested in using the target-date fund in its entirety to use some type of in-plan advice solution, such as advice or managed accounts.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
