How to Help Participants Avoid These Target Date Fund Missteps
Target date funds (TDF) are in high demand these days. According to a recent Sway Research study, total TDF assets reached $3.5 trillion in 2023 — a record level. Moreover, mutual fund target dates began 2024 slightly ahead of collective investment trusts, holding $1.76 trillion in assets compared to $1.71 trillion in CITs, TDF assets in CITs are expected to overtake assets in mutual funds this year as fiduciaries continue to look for ways to reduce fees and access innovative solutions.
TDFs offer participants many advantages: a simplified investment decision-making process, diversification by professional fund managers, automatic rebalancing, a glide path strategy that adjusts risk over time, and much more. Given the popularity of these funds, plan sponsors should help ensure participants understand how their TDF works to maximize their potential benefits — and avoid common missteps that can undermine their retirement strategy.
Getting mixed up. TDFs are designed as stand-alone investments. However, some participants may not realize the potential impact of mixing their already diversified funds with other investments, including inadvertently increasing their risk exposure. Understanding the underlying strategy behind TDFs is crucial to maximizing their utility as part of a prudent investment plan and avoiding any unintended consequences. TDFs typically do not transparently indicate their risk level so participants may find it difficult to easily determine if the plan’s selected TDF is a good fit for them.
Some things change. TDFs are often thought of as a set-it-and-forget-it investment, but retirement time horizons, individual investing goals, or risk tolerance may change over time. Without regular reviews with a financial advisor, the TDF and participant may end up on divergent trajectories.
Hype hunting. Participants looking to capitalize on the latest hot market mover, such as AI, may feel they’re missing out on their TDF due to a lack of control over individual investment choices. For these types of investors, the selection of a TDF may be based more on its popularity than a full understanding of its operational parameters — and the potential benefits of a well-diversified portfolio. This is partly because, in the short term, diversified investments don’t always feel gratifying. In a bull market, for example, they’ll typically underperform the S&P 500; and in a bear market, they usually outperform the S&P but may still yield negative absolute returns. Employees should be educated on the benefits of diversification that have been historically born out with solid performance and overall risk reduction when participants maintain a long-term time horizon for their investments.
When paths cross. Not all TDF glide paths are created equal. For example, some allocate more heavily to equities resulting in a more aggressive growth-oriented glidepath while others prioritize stability via a higher allocation to fixed income. Investors should also understand how their assets are managed during the accumulation and decumulation phases.
Targeting Knowledge Gaps
With the tremendous growth and popularity of TDFs, participant education on the topic can be an important and valuable addition to financial wellness programming. By empowering participants with knowledge and guidance, plan sponsors can help them navigate the complexities and nuances of TDFs to make better-informed decisions about their retirement strategy.
Sources
https://static1.squarespace.com/static/5661aba4e4b0c3b0ea70a07a/t/65c4eec9862cb467557d1102/1707405005580/Sway_Res_2024_StateofTDs_Brochure.pdf
https://www.morningstar.com/funds/are-you-using-your-target-date-fund-incorrectly
https://www.plansponsor.com/target-date-assets-reach-record-high-3-5-trillion-in-2023
Please contact your MCF Advisors Plan Consultant with any questions or to review your current plan and plan’s offerings.
IMPORTANT DISCLOSURE INFORMATION
MCF Advisors, LLC (“MCF”) is a SEC registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. More information about the adviser can also be found by visiting: https://adviserinfo.sec.gov/firm/summary/130372. The above commentary is for informational purposes only. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. This is not intended as an offer or solicitation with respect to the purchase or sale of any security. MCF may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by MCF), or any non-investment related content, made reference to directly or indirectly in this blog/newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog/newsletter serves as the receipt of, or as a substitute for, personalized investment advice from MCF. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. MCF is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal or accounting advice. A copy of MCF’s current written disclosure statement and customer relationship summary (“Form CRS”) discussing our advisory services and fees continues to remain available upon request. The scope of the services to be provided depends upon the needs of the client and the terms of the engagement. If you are a MCF client, please remember to contact MCF, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services.