When selecting a target date fund, defined contribution plan sponsors and individual investors can choose from both passively managed strategies—those that invest in an underlying basket of index funds—and actively managed strategies, which seek to enhance returns through security selection and/or tactical asset allocation moves to exploit potential short‑term market opportunities.

When considering active target date funds, investors may wonder if an active management approach justifies the higher management fees that such funds typically charge relative to their passive competitors.

To demonstrate that T. Rowe Price’s active management approach has created value for our clients, we examined the relative performance of our Retirement Funds (RFs). The focus of our study was on performance relative to the passive target date strategies offered by our competitors.¹

Study methodology

To represent the passive alternatives to T. Rowe Price’s actively managed target date strategies, we used a series of composite performance indexes defined as passive; they were identified as having an “Active Passive Breakdown Percent Index Funds” of 75% or greater by Morningstar. These indexes included passive funds offered by major target date providers, such as The Vanguard Group, Fidelity Investments, BlackRock, Inc., and State Street Corporation.²

The comparison index for each T. Rowe Price RF included the passive funds in the Morningstar universe with the same target date as the RF. The returns on these indexes were based on an equally weighted average of the oldest share class offered by each competing passive fund.

Even for target date funds in the same category, there may be material differences among funds, including fees, expenses, and the portfolio mix of stocks, bonds, and other assets. Target date funds typically change their asset class allocations over time according to a predetermined glide path. Security selection within the underlying investments that make up those allocations can vary greatly between fund families and may have a material impact on fund performance.

RF relative performance was measured across rolling 10‑year periods (rolled monthly) over a 20-year window through year-end or since inception for RFs with shorter track records. Thus, the older the RF, the more rolling performance periods it had in each time frame studied.

Two performance measures were calculated for each RF:

• Active success rate: The percentage of total rolling periods in which the RF outperformed its passive competitor index. A positive success rate for a fund was defined as achieving a higher return than the relevant passive competitor index in more than 50% of all periods included in the study.
• Excess return: The return for each RF relative to its passive competitor index, averaged across all rolling performance periods in a given time frame.

To provide a high‑level summary of the relative effectiveness of T. Rowe Price’s target date process, we also calculated performance averages covering the RFs in the study. These averages were time weighted based on the percentage of the total rolling performance periods in each time frame provided by each RF.

Retirement Funds excluded from the study

One T. Rowe Price Retirement Fund—the Retirement 2005 Fund—was excluded from this study, as the fund had a limited number of passive peer constituents in the Morningstar universe. Another fund, the Retirement 2065 Fund, was excluded because it did not have any rolling 10-year performance periods as of year-end.

Our approach to active management

T. Rowe Price’s target date process seeks to improve outcomes for our target date clients at multiple levels—via glide path design, long‑term diversification, tactical asset allocation, and our active management approach. We believe the value added by our target date implementation can meaningfully enhance retirement outcomes for investors.

"We believe the value added by our target date implementation can meaningfully enhance retirement outcomes for investors."

Bottom‑up fundamental research is at the core of how we manage the underlying strategies in our target date funds. That means that our investment professionals go out in the field to uncover opportunities. They study them firsthand. And use those insights to help give our clients an investment edge.

Our target date managers—backed by our committee of asset allocation experts from across multi‑asset, equity, and fixed income—seek to get ahead of change by identifying attractive near‑term asset valuations and using prudent tactical allocation adjustments to take advantage of those potential opportunities.

Experience has been a critical component of our success as well. We’ve managed investments through all kinds of markets, and our portfolio managers average over 20 years of experience in the industry. Significantly, many of our analysts go on to become portfolio managers, which we believe creates a strong foundation on behalf of our clients.

Appendix

The relative performances of T. Rowe Price Retirement Funds (RFs) (Figure A1) were examined across 10‑year rolling periods (rolled monthly) over the last 20 years through year-end. Because inception dates—and, thus, fund longevities—differed, the number of rolling performance periods also varied for each RF.

Returns for each T. Rowe Price RF were compared with the returns on an equally weighted index of competing passive target date funds. This average was calculated based on the net asset value (NAV) performance of the oldest share class offered by each competing passive fund.

How the passive competitor indexes were constructed

The target date funds included in the competitor indexes were defined as passive; they were identified as having an “Active Passive Breakdown Percent Index Funds” of 75% or greater by Morningstar. Only funds that were open and available to investors as of year-end were included in the passive competitor indexes.

For each RF, an index was constructed of competing passive funds that shared the same target date. This index incorporated the oldest share classes offered by the competing funds, and the returns were equally weighted at the beginning of each performance period. For the corresponding Morningstar categories for each vintage, see Figure A2.

Returns for the RFs and the passive competitors were based on daily NAVs and thus reflected the subtraction of management fees and other investment costs from both sets of funds.

Our competitor indexes included only those funds with the same target dates as the RFs in the study. Relatively few competing funds existed over some performance periods, particularly for older RFs.