Broker Check

Evaluating Your Target Date Series

Client Centered

By Tom Nickol

The Target Date Series has grown to be the most important asset class in the investment lineup.  Most new contributions are being made into these investments for good reason.  These age-based funds start plan participants close to where their actual risk tolerance may be.  Through time, the equity exposure reduces automatically as the participant gets ever closer to retirement.

One issue that is ignored by plan sponsors is monitoring the Series choice.  Much attention is devoted to the investment lineup at large, but the Target Date Series is passed over.  Litigation in one mega-plan, Walgreens, focused specifically on their Series.  Plan sponsors in non-mega plans can learn a lesson from this suit.

Understand the glide path’s risk:  Every Target Date Series has a beginning point and a retirement date.  Equity (and risk) is highest at younger ages.  The slope towards retirement represents the glidepath.  Risk is reduced as the employee ages.  Just how much equity exposure at the start of retirement is an important consideration when selecting a series.  The equity range from the various Target Date providers is from under 10% to over 60%.  The market downturn earlier this year highlighted the risk sponsors and participants face.

Understand the demographics and participant behavior:  Plan demographics drive glidepath strategy based on the funded status of the participants, which is primarily driven by contribution rates and account balances. These factors, in addition to the sophistication of the participants, dictate their need to take risk.

Participant behavior influences optimal glidepath strategy to the extent that participants are more or less engaged with their retirement plan. Their expectations regarding the timing of distributions and overall willingness to take risk are also key factors.

Understand the underlying funds:  What makes up a Target Date Series?  Essentially, a Series is made up of numerous funds; a fund-of-funds.  Whether the Series provider uses an active or passive strategy, the Series is always managed.  The provider’s investment committee decides which funds make up the Series, the level of risk exposure, and when to change and adjust the Series.  It is highly dependent on the strength of the underlying investments.  The question is, “could the underlying funds stand scrutiny if they were independently judged?”

When markets are strong and growing, plan sponsors and financial advisors don’t prioritize the Target Date Series.  As we experienced the Spring of 2020, a sharp downturn in the market shines a light on the importance of monitoring the Series. Plans can benefit from performing a stress test to learn how well their Series would fare when the next downturn arrives; a process Walgreens wished it had done.

Last reviewed 05/24/2022

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