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Price Perspective - In Depth

An Evolving Target Date Landscape: Insights to an Informed Assessment Process

Craig Keim, Head of Investment Platforms and Services

Executive Summary

  • The increasing reliance on target date funds (TDFs) as the core defined contribution (DC) offering designed to help participants achieve successful retirement outcomes has resulted in exponential growth in assets and participant use, an evolving landscape of offerings, and increased regulatory scrutiny and guidance in the selection and monitoring of TDFs. This leaves plan sponsors with the complex task of assessing TDFs for an approach that not only meets their plan needs, but that is also aligned to their governance capabilities.
  • Sponsors should carefully consider the value proposition that different target date approaches offer, including the potential benefits to participants, alignment to plan objectives, and the value-for-fee proposition. Defaulting to the least expensive offering is not a thorough process and does not ensure the participants' needs are met. It also does not guarantee protection against claims of fiduciary liability, which we believe is misunderstood in the marketplace today.
  • We believe a clear framework designed to inform TDF decisions—one that takes into account a plan’s specific objectives, characteristics, risk preferences, and governance capacity—can help sponsors make prudent decisions when evaluating a TDF implementation approach.
  • This paper offers a framework for sponsors to establish a belief set and clarity of governance structure that provides sponsors a solid foundation to inform their review and selection of a specific TDF solution.

Given the growing importance of target date funds in defined contribution retirement plans, it’s not surprising that many plan sponsors are carefully evaluating their TDF offerings.

As fiduciaries, DC plan sponsors are required to be prudent investors and make all investment decisions based solely in the best interest of the plan’s participants. In fulfilling that role, sponsors face scrutiny from many parties, including policymakers, regulators, and participants. Adding to the complexity of their task is the fact that the provider community now offers a diverse spectrum of target date solutions. Although this diversity enables sponsors to select the solution that they believe best matches the specific needs of their participants, it also adds complexity and can complicate the due diligence process.

In this paper, we offer a framework of guiding principles that we believe can help plan sponsors make more informed decisions when evaluating and selecting target date solutions and choosing among target date implementation options.

THEN VERSUS NOW

The 2006 Pension Protection Act (PPA) laid the foundation for a smarter way to deploy DC assets on behalf of participants by allowing plans to designate a qualified default investment alternative (QDIA). Post-PPA target date solutions have become a foundational investment offering for a growing number of DC plans, as evidenced by the analytics below:

Target date offerings account for more than 25% of assets invested in U.S. defined contribution plans.1 Some studies show that more than 90% of DC plans have a QDIA as a default investment fund and 85% use TDFs as the QDIA.2

TDF assets in 401(k) plans are projected to surpass $2 trillion by 2020 and could make up more than 70% of 401(k) plan contributions.1

According to Willis Towers Watson, 80% of Fortune 500 companies now only sponsor a DC plan as a primary source of private retirement income.3

These statistics reinforce the fact that asset managers and advisers need to partner with plan sponsors to ensure they are making the best and most informed decisions for their participants.

The DC industry has progressed in how DC plans are approached, sharpening the focus on how decisions are made and the influences that sponsors should consider when structuring their plan’s investment offerings. Since PPA, we've seen shifts in the landscape of DC offerings as well as increased clarity about sponsor oversight responsibilities and the considerations when selecting and monitoring TDFs.

As the DC industry, and by extension the TDF segment, has matured, a range of ways to approach TDF implementation has evolved. These alternatives include bundled target date offerings, which offer comprehensive, one-stop implementation, as well as customized solutions that unbundle the implementation components and are generally tailored to plan specifications. Sponsors must also make decisions about a multitude of other TDF implementation factors, such as the shape of the glide path, the underlying asset class exposures, and the choice of investment management techniques—whether active, passive, or a combination of both approaches.

FIGURE 1: Key Influences Shaping TDF Evolution

Source: T. Rowe Price

Price Perspective

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Given the growing importance of target date funds in defined contribution retirement plans, it’s not surprising that many plan sponsors are carefully evaluating their TDF offerings.

1 Cerulli Edge, U.S. Edition, Issue #222, February 2016.
2 Callan, 2016 DC Trends.
3 Willis Towers Watson, Insider, Volume 26, Number 3, March 2016.

 

2017-US-30271

 

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. The views contained herein are as of February 2017 and may have changed since then. Price Perspectives are provided for informational and educational purposes only and are not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. This Price Perspective provides opinions and commentary that do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance cannot guarantee future results. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc.
 

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