How are target date funds performing? “It depends on the series, and the glide paths within the series,” said Jeff Holt, a target date fund analyst with Morningstar, in an interview from the research firm’s annual investment conference in Chicago.
“It sounds obvious, those with a heavy allocation to asset classes that have done well have performed well as a result, so U.S large-cap for instance,” he explained. “Fund families like American Funds and JPMorgan (which got the allocator of the year for SmartRetirement series) are example. But those that have a heavy allocation to, say, emerging market stocks haven’t done as well.”
But ask Holt a follow-up, how investors are doing with target date funds, and his answer is more direct.
“Investors are using them well. They don’t exhibit the typical behaviors of fear and greed with target date funds, and as a result stay the course and remain invested longer.”
He noted that the “big three” of Fidelity Investments, Vanguard and T. Rowe Price, still dominate the market, but that dominance has recently waned.
“Target date funds tend to be very sticky, and those three companies account for 70% of the assets in TDFs, but that has come down from 75% and even 80%.”
As for TDF innovation in the near-future, Holt said it will focus heavily on retirement income payout systems, such as incorporating deferred annuity-like solutions into withdrawal systems.
“The focus has been on asset-class diversification on the way up to retirement, but not as much in or through retirement. That will start to change. It might be adding alternative investments, for instance, but that would add cost and complexity, and TDFs are known for their simplicity.”
Hybrid funds, he added, will also become more prevalent, and he specifically mentioned JPMorgan, The Principal and PIMCO combining active and passive allocations to their TDFs.
“One interesting thing is that glide paths usually stick to equity and bond allocations, but we decided to peel it back a level further. We looked into exactly what was in the equity and bond allocations. What was the ratio of domestic to international equities, what about corporates versus TIPS, that sort of thing?”
He emphasized that it is incredibly important for plan sponsors and retirement plan advisors to know what the specific allocations consist of.
“You can’t go completely passive in TDFs because managers still have to make active decisions about allocations, regardless,” Holt concluded. “This is especially true now that the DOL has increased scrutiny as they attract more and more assets. It’s more important for plan sponsors and retirement plan advisors to really know what’s in them.”
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.
