Is there any such thing as a truly passive target date strategy?
It’s a debate as old as the product itself, as underlying passively managed investments must be closely monitored to ensure they’re fulfilling stated objectives.
They’re the kinds of fiduciary-related considerations that will become increasingly important moving forward, according to new research from PGIM Investments.
“As the role of target date funds within retirement plans has grown, so too has the importance of understanding fiduciary responsibilities and maintaining prudent processes around TDF evaluation,” the paper, titled “Finding the Target Date Sweet Spot: Evaluating the Hybrid TDF Landscape,” notes.
Though passive strategies have dominated TDFs for the past 10 years, a new research piece from PGIM Investments investigates why a shift to hybrid TDF strategies may be on the horizon.
“Hybrid TDFs—which incorporate active and passive management—may be poised for a period of outperformance as we face a changing market environment,” it adds. “This is significant as capturing even slightly increased returns can help participants’ assets last years longer in retirement.”
Further, the paper claims that an overcommitment to passive TDF management is not only hurting TDF returns but could constitute a breach of fiduciary duty.
Additional insights from the paper include:
Breach of Duty
Fiduciaries can lean on passive strategies to limit their exposure to lawsuits. However, by focusing solely on keeping fees low, fiduciaries could soon be found to not be operating in the best interests of their plan participants.
Benefits of Hybrid TDFs
The hybrid approach presents the opportunity to employ active strategies that have asset diversification power, which can help boost returns. For example, a modest allocation to real estate can help protect participant assets in market declines.
Measuring Hybrid’s Potential
Hybrid TDFs are already gaining traction, but measurement remains a challenge. PGIM Investments proposes a metric—the Active-Per-Basis Point Expense calculation—to help fiduciaries compare how much active exposure investors receive relative to each unit of expense they are paying.
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.
