To give participants a better chance for retirement readiness — and to satisfy fiduciary obligations — plan sponsors should have a process for evaluating and monitoring target date fund offerings.
American Funds believes in a five-point evaluation process. Presented below are the five considerations along with actionable ideas for each one.
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Consideration 1: Participant Needs
- Conduct a plan information audit to determine what participant data you already have.
- Start planning ways to collect participant data.
Consideration 2: Glide Path Construction
- Examine the size of stock allocations throughout the glide path.
- Search for a series whose investments in traditional asset classes provide high diversification without sacrificing liquidity or increasing fees.
- Seek low-fee options that can provide opportunities beyond benchmarks.
- Look for a series that takes an evolving approach to allocations within major asset classes to help lower volatility.
Consideration 3: Value Versus Cost
- Analyze fees between target date series.
- Check fees of different share classes.
- Compare series’ returns against expenses to determine value.
Consideration 4: Quality of Underlying Funds
- Review the persistence of underlying funds’ returns.
- Examine the consistency of underlying funds’ strategies and management.
- Evaluate underlying funds’ approaches to diversification and risk management.
Consideration 5: Consistency
- Check the stability of the fund’s approach, including its glide path.
- Review series results, considering consistency and down-market protection.
- Evaluate series management personnel and structure.
Visit americanfunds.com/advisor for an online How-To guide. Contact your American Funds sales professional for more information on target date fund evaluation.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and on americanfunds.com and should be read carefully before investing.
Although target date funds are managed for investors on a projected retirement date time frame, the funds’ allocation strategy does not guarantee that investors’ retirement goals will be met. The target date is the year in which an investor is assumed to retire and begin taking withdrawals.
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