Rethinking Target Date Strategies

Target date strategies have experienced record asset growth. They are increasingly being used in defined contribution plans by participants who are enrolled in these solutions by default.

However, significant differences among target date offerings exist—asset allocation, underlying design and philosophy—presenting a challenge for plan sponsors in the selection and monitoring of target date strategies. While historical risk and performance measures indicate how a strategy has performed in the past, they do not provide insight into the suitability of a strategy for specific participant populations.

Recent Department of Labor (DOL) guidance also highlights the need for deeper evaluation. It is more important than ever for plan sponsors to conduct a detailed analysis of the target date series they offer to ensure that the choice they have made is appropriate. In this article, we discuss the significance of target date strategies, the dramatic differences among options available, the importance of target date analysis based on glidepath suitability and how our proprietary TDAnalyzer™ can help fiduciaries comply with DOL guidance.

Significance of target date strategies today

Although target date strategies were introduced in 1993, their usage exploded after the passage of the Pension Protection Act of 2006 (PPA). This growth created significant exposure to a relatively new asset class, creating a sense of urgency among plan sponsors to identify comprehensive, yet practical ways to analyze these investment options. The PPA encouraged the use of “auto-enrollment” and defined default investment alternatives, into which participants would be invested if they failed to make an active election. In order to obtain the safe harbor relief related to future investment outcomes associated with default options, sponsors were required to select a Qualified Default Investment Alternative (QDIA)1.

Total Target Date Assets 2,3,4

Rethinking target date strategies graph 1

In less than a decade, target date assets have grown nearly 600%. Accelerated growth is projected to continue.

Of the three types of investment options listed as potential QDIA’s by the DOL, target date strategies have seen the highest adoption rate.

 

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1 “Regulation Relating to Qualified Default Investment Alternatives in Participant-Directed Individual Account Plans”, United States Department of Labor,
Employee Benefit Security Administration, www.dol.gov.
2 “Target-Date Series Research Paper: 2012 Industry Survey”, Morningstar Fund Research, May, 2012, Josh Charlson, Ph.D., Laura Pavlenko Lutton.
3 “Ibbotson Target Maturity Report 4Q, 2012”, Ibbotson Associates, Inc., 2013, Jeremy Stempien, Cindy Galiano.