Exploring the Target Date Landscape with Mercer’s Preet Prashar

[00:00] – Rethinking Fiduciary Overviews: Why glidepath selection is an ongoing oversight responsibility, requiring re-evaluation every three years.

[02:11] – Market Concentration Risk: Managing fiduciary exposure when a small handful of mega-managers control the vast majority of TDF industry assets.

[04:15] – The Active, Passive, and Hybrid Debate: How hybrid target-date structures are capturing market share by balancing fee budgets with active alpha generation.

[06:36] – Debunking ‘To vs. Through’ Classifications: Why looking at the granular asset allocation at age 65 matters more than arbitrary manager labels.

[09:12] – The Democratization of Custom TDFs and CITs: How collective investment trusts are bringing tailored custom design capabilities down to the mid-market space.

[11:15] – Alternative Assets & Private Markets: Evaluating the current hurdles—liquidity, daily valuation, and litigation risks—facing private equity integrations.

[13:14] – Measuring TDF Success Metrics: Analyzing 20 years of historical returns to prove target-date series are effectively meeting their 40% to 50% replacement goals.

Preet Prashar: [00:00:00] the other thing we note here is glide path selection, it’s not a one-time decision. We encourage plan sponsors to revisit glide path suitability perhaps every three years or sooner if the demographics change.

Brian Anderson: This is 401Specialist editor-in-chief Brian Anderson, and this is the 401Specialist podcast. During the second quarter of this year, 401Specialist is doing a deep dive on target date funds, along with dominant qualified default investment alternative (QDIA) in 401(k) plans and the primary engine of retirement savings for millions of participants.

Recently, prominent global consulting firm Mercer published a new white paper, “Target Date Landscape: The Evolution of Target Date Strategies and Future Considerations,” which explores a broad range of trends and topics impacting the TDF business. To drill down on some of the key insights from the paper, we’re happy to be joined today by Preet Prasher, the director of Defined Contribution Strategic Research teams at Mercer and one of the authors of the [00:01:00] paper.

He has more than 20 years of industry experience and advises DC clients on target date funds, retirement income, and stable value strategies. Preet, welcome to the 401Specialist podcast.

Preet Prashar: Yes. Thank you, Brian. Glad to be here, and, thank you for having me on your podcast. So I’m Preet Prashar.

I co-chair Mercer’s Target Date Research, and today we’ll highlight some of the key themes from our recently published paper on target date. It’s called Target Date Landscape. And the key themes that we like to cover is market size and concentration the rise of passive target date series, the glide path trends we’re seeing, trends in fees, as well as some of the new features that we’re noticing in target date solutions.

Navigating TDF Market Concentration

Brian Anderson: Okay. Well, let’s start out by talking a little bit about, target date market size and concentration. Your report notes that there’s been big growth in the market over the past decade. What’s changed, and why should plan sponsors [00:02:00] care?

Preet Prashar: Sure. So if we look at the target date market today, we estimate that market to be about $5 trillion.

So at the end of, year-end 2025, the off-the-shelf target date market, we estimate it to be about $4.7 trillion. So if we go back about 11 years in spring of 2015, target date market had just crossed about a trillion dollars. That’s off-the-shelf target date market. So just in a span of about 11 years, market has grown more than by 4X.

So that, that’s a lot of growth. More importantly, what we estimate is there are about nine managers that manage most of these target date assets. So the market is– the industry is somewhat concentrated, but that doesn’t mean the plan sponsors have fewer choices. So many of these large providers, they, they have multiple variations of their flagship target date series.

So we don’t believe that the plan sponsors are necessarily short on choice, [00:03:00] on target date choice. one takeaway for the plan sponsors, again, I’ll repeat this during our podcast, is document the why, how, and what of your target date selection process. That, that is the key.

Brian Anderson: All right. That’s good advice.

 The paper also seems to show that, passive target date series and CITs seem to be growing. What should committees be thinking about here?

Preet Prashar: Sure. Let me first explain why we think that… What are some of the reasons behind this growth. What we have found among plan sponsors when they look at the results from the active and blend target date series lot of these series incorporate tactical asset allocation calls. By that, I mean that a manager may decide to change their glide path in maybe not in a major way, but to tweak their glide path over the next, say, o-one month to five years based on their short-term market outlook.

What we find is a lot of these tactical calls haven’t been consistent in [00:04:00] adding alpha. So that has not gone well with plan sponsors. The second thing we find is a lot of these series, their active underlying funds, which are used in the active and blend series, they haven’t been consistently adding value, meaning they haven’t been outperforming their custom benchmarks.

So these are the factors that, are not necessarily in the passive target date series. Most passive target date series avoid making tactical c-calls, so they’re very strategic in nature. And the plans– and they don’t obviously use the active underlying funds. So the plan sponsors, they view this as a fewer things that can go wrong with a passive target date series.

So that, we think, has been a major factor. And then the other key factor we think that’s driven a trend towards passive is, is the litigation. So a-as you know, Brian, a lot of the litigation over, over the past few years has been around performance as well as fees. So the passive target date series [00:05:00] typically have lower fees in comparison with blend and active.

And then in terms of performance r- especially r-performance relative to their, their custom benchmarks, passive t-series don’t trail as much as an active or blend can trail. So there can be positive or negative alpha with the active or blend series. And last thing I would point out here is that the window to recover from a mistake in, in defined contribution, DC, is narrower than in a DB.

So in D– defined benefit, we, we often hear the term that over a full market cycle, XYZ product would outperform its benchmark. But in the defined contribution world, we have no idea when a participant might decide to leave their job, take their savings out, decide to retire, or decide to a-allocate to another investment option.

Meaning that m-lot of plan [00:06:00] sponsors, for this reason, they want a steady Eddie performance, more predictable. So that is… All that combined has led to passive gaining market share.

Deconstructing Glidepath Equity Allocations

Brian Anderson: All right. That certainly makes plenty of sense, and I can definitely attest that, plan sponsors are certainly interested in mitigating litigation risk.

Along those lines, I’m wondering if you can share any common missteps that you see plan committees making during target date reviews.

Preet Prashar: Sure. So we have noticed some few rec-reoccurring items, or issues. One thing we often notice, overemphasizing one or two metrics. That’s not to say they’re only considering one or two metrics, but psychologically, they may be more low-lower fees or, and performance only. What we stress is that the plan, it’s a mosaic that a plan sponsor is putting together. So fees, performance, obviously important part, but also look at the glide path fit, especially in context of a plan’s demographics.

 Is the plan sponsor comfortable with the [00:07:00] glide path or the risk relative to the plan’s population? So, and document that. And then the other thing we note here is glide path selection, it’s not a one-time decision. We encourage plan sponsors to revisit glide path suitability perhaps every three years or if, or sooner if the demographics change.

So it’s not a one-time set it and forget it type decision. I would say the other factor here is at times we notice there’s inadequate documentation. So for example, many of our newer clients, when we look at what was the criteria used for selecting the incumbent target date series, sometimes we find that there’s- There’s not adequate documentation, which is what we stress.

 Document how, when, and all of those. And then lastly, and again, this is not a big trend. Occasionally, I’ve seen committee members trying to time the market. So for example, this was about a decade ago one of plan sponsors, they wanted to exit out of a more aggressive glide path [00:08:00] because their point of view was that market had had a good equity run over the last five-plus years, so it was time to take money off the table and go into something more conservative.

Now, these things are designed for, four-plus decades in mind, so trying to time the market is not something we would encourage, but it’s more about the fit, putting together the mosaic with all the other factors I’ve mentioned.

Brian Anderson: Okay. Well, now I’d like to talk a little bit about, target-date fund glide path evolution.

How have glide paths changed recently, and, and why does that matter for participants?

Preet Prashar: Sure. So When we looked at the data, from ten years ago, and year-end twenty twenty-five, based on Mercer’s quarterly target-date survey, we found that the median glide path, especially for younger participants, had become a little bit more aggressive.

By that, I mean there was more allocation to equity and real assets. So for example, if a vintage had ninety percent allocation to equity and real assets at the end of twenty [00:09:00] fifteen, the median the same equivalent vintage at the end of twenty twenty-five had about ninety-five or ninety-six percent, equity and real assets allocation.

And the rationale, and why does it matter for participants? Managers have cited different rationale for increasing equity. And I must say that not all managers have raised equity, but, but few have. But the rationale includes that, participants are living longer, and they’re reliant more on their, on their savings from defined contribution.

And so the target-date solution has to deliver more, meaning it has to accumulate more wealth for a participant to be able to retire comfortably. So that’s one of the reasons. And the other reason what we, suspect is that some of the series, there’s a, there’s a survivorship bias.

So some of the series that were there ten years ago, they have been liquidated. And partly because they were more conservative, their relative performance didn’t look so great compared to peers. So there’s that survivorship there. And [00:10:00] the third reason we suspect is that there may be S-some managers who are more aware of peer performance.

So having higher equity early on could definitely help relative returns. But again, I wanna be cautious that we, you know, that’s not necessarily a cited reason, but po-potentially that could have played a role.

Brian Anderson: Interesting. Okay. So now when it comes to fees and fiduciary considerations, it’s, it’s no secret that with all the litigation that fees have been under plenty of scrutiny.

What are the key considerations in this area for plan sponsors right now?

Preet Prashar: Yeah. the fees have been increasing, or decreasing over the past decade across active, passive, and blend series. So the fees have clearly decreased. But we continue to stress to the plan sponsors, fees are not everything.

They have to look beyond fees. But I would also point out that lower fees continue to raise the bar higher for [00:11:00] any new innovation to come in and make a difference net of fees. Fees is a-again, being fee aware of course, but are fees the only factor? We stress that it shouldn’t be.

Brian Anderson: All right.

Now no discussion about target date funds is gonna be complete these days without talking a little bit about lifetime income solutions and even more recently, private assets. Do you see more plans starting to move in these directions?

Preet Prashar: So What we have noticed is that there’s a lot more conversation or interest from plan sponsor to learn more about especially solutions that incorporate lifetime income.

So there’s a lot of conversation around that, but that hasn’t necessarily equated to a lot of action. A lot of plan sponsors, they want to understand how the landscape is evolving. They know new products are coming to the market, so they want to keep a pulse on the, that innovation before [00:12:00] they make a-any decision.

We have seen few plan sponsors move in that direction, incorporating lifetime income, either via target date or through another method into their plan. In terms of private assets, look, the concept of private assets isn’t totally new in, in target date funds. So we’ve had target date series that have allocated to private real estate over the past decade.

What we’re talking about here is what’s bringing in private equity or private credit. We have seen some new series come to the market, and there are other providers that are close to… that, that are seriously looking at the possibility of launching such a solution. But what we’ve noticed is that the plan sponsors, want to see this in live in real world and see how it performs.

They’re not necessarily against it, but they want some proof of concept what happens five years down the road. How does that perform? You know, does it deliver [00:13:00] net of fee performance or net of fee results that outweigh the lower fees? So they, they’re, they’re not opposed to it, but they want to see results.

Historical Return Performance & Success Metrics

Brian Anderson: the DC space seems to move at a notoriously slow pace, so it’s not a big surprise that it’s, it might take a while for momentum to build around lifetime income solutions, and it’s likely gonna be the same for private assets as well.

All right, before we wrap this up could you, uh, leave the audience with maybe a couple of quick takeaways?

Preet Prashar: Sure. So we, we recommend that governance matters. So again, um, I’d like to reiterate that please document the how, what, and when of your decision, uh, in s-terms of selecting a target date, uh, solution.

Maintain that active oversight. That means, glide path suitability in context of your demographics. And it maybe check glide path suitability every three years. And [00:14:00] then f-we also encourage that when a d- a target date series is selected, look… evaluate your decision from multiple angles, not just focus on past performance or fees, but all; glide path fit, management’s philosophy, process, the team itself, and what is…

And don’t only focus on just one t- aspect of performance or such as returns or sharp ratios. Also perhaps looks at, look at drawdown, max drawdown for participants near and in retirement because that can trigger ba-bad behavior, uh, or participants to exit at a bad time in the market. So again, it’s a mosaic that needs to be put together as opposed to a decision that’s driven by one or two factors.

Within our paper, we find one of the questions we asked was, “Have target date solutions delivered?”

Meaning You know, we have benchmarking, traditional benchmarks, but have they delivered in terms of if I am saving for retirement, have they met the manager’s objectives? [00:15:00] So what we find is the short answer is yes. So many target date managers, they design their solution with a goal of forty to fifty percent income replacement.

So replacing your last year’s paycheck, there’s enough wealth accumulation from target date series that it can replace forty to fifty percent of your last year’s paycheck. We analyzed the returns over the last twenty years, and we find that target date series have met that objective. So if participants did all the right things, meaning they worked,

they contributed to their 401, they maxed the employer match, they are on track to replace forty to fifty percent of their retirement income. But if we are looking at one hundred percent, target date hasn’t delivered that, and that was not the intent.

Brian Anderson: Well, I think you’re right. That was certainly never the intent, but it is nice to hear that target-date funds have indeed been doing what they were intended to do. Preet, I wanna thank you for sharing a lot of great information today, and I also want to remind listeners that we have a link to the target-date [00:16:00] landscape whitepaper that we’ve been talking about.

It’s on the homepage for this episode on the 401Specialist website. Preet Prasher, director of Defined Contribution Strategic Research teams at Mercer, thanks for joining us today on the 401Specialist podcast.

Preet Prashar: Thank you, Brian.