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Getting Beyond Labels in the "To vs. Through" Debate

Whether it’s “to” or “through” retirement, there’s plenty of room for improvement in explaining the goals of target-date funds. 

Josh Charlson, 10/10/2011

One of the catch phrases of the target-date industry is “to” versus “through.” The idea is that some target-date series are built to manage the investors’ asset allocation to the time of retirement, represented by the date on the fund (such as 2010 or 2015), while other series are constructed to take the investor through retirement. Earlier in 2011, the issue of whether target-date funds should go “to” or “through” retirement was revived in a report released by the U.S. Government Accountability Office at the request of U.S. Sen. Herb Kohl’s Special Committee on Aging. In that report, the GAO suggests that the Department of Labor require plan sponsors to consider the suitability of a target-date series’ asset allocation when choosing a provider because of the great variability among the asset-allocation glide paths.

The “to” versus “through” proposition sounds like an elegant division but is muddled in practice. Funds with unchanging glide paths after their target dates are said to be “to” because the target-date fund provider is not attempting to model investors’ risk/return needs during the retirement period, and therefore, the series’ asset allocation or glide path should not change. In contrast, those with glide paths that continue to change after their retirement date are said to be “through.” Those fund series are modeling investors’ needs during the years following retirement. Lacking clear statements from the target-date families as to whether their funds are intended as “to” or “through,” plan sponsors or investors using target-date funds are forced to use their own judgments to determine which is which. Moreover, that basic distinction can have a big impact on how an investor or advisor might incorporate a target-date fund into a broader portfolio at or during retirement.

To shed light on the debate, Morningstar took a closer look at how the industry’s glide paths are actually constructed, using the glide-path data available in fund prospectuses. The “to” group comprises those target-date series whose glide paths do not change after the retirement date, and the “through” group comprises those series whose glide paths continue to change following the retirement date. In some cases, the analysis required a degree of interpretation by Morningstar data and mutual fund analysts because of the challenges discussed above. While certain broad generalizations do differentiate the two groups, Morningstar found there is also a great deal of variability within each group, and more than a few cases are difficult to place altogether.

No Consensus
We found no asset-allocation consensus in the industry regarding the prevalence, superiority, or clear categorization of “to” or “through” glide paths. Of the 41 glide paths Morningstar examined, 23 fell into the “through” group, with the remaining 18 landing in the “to” camp. Even though the “through” glide paths are in the majority and even though several firms, such as John Hancock and Vantagepoint, have extended the phase during which they reduce the funds’ equity exposure, there’s no evidence that such glide paths have a lock hold on the industry’s thinking.

The “to” and “through” samples look very similar in their asset allocation when investors are in their early earning years. For target dates 2055 through 2040 (intended for investors ages 20 to 35), the average equity allocations are nearly identical, roughly around 90%.

It’s when investors get closer to retirement that the differences start to show up, as “to” series typically move more rapidly toward the lower final equity point. The 2020 funds show 14-percentage-point difference in equity allocation, for example, and that difference grows to 16 points by the retirement date. At retirement, the “through” funds average a 49% stock allocation while “to” funds land at 33%. It’s not until 10 years later that the glide paths meet up again, as “through” glide paths hit an average allocation of 33%. Some “through” funds reduce their exposure to stocks over an additional five to 15 years.

So, it’s in that 20-year band around the retirement date that the differences are most stark. Clearly, “through” glide paths on average carry higher equity risk, fitting the belie that the risk of retirees outliving their nest egg requires more stock investments, over longer periods, in order to raise the probability of those assets lasting through retirement. “To” paths, as advertised, cut down equity to a more manageable level by retirement, reducing the risk that investors’ assets will experience a catastrophic decline just prior to their time of need.

Devilish Details
Yet those averages mask a wide range of risk/reward profiles within each group. Fo example, the equity allocations for “to” funds ranged from 24% to 50% and from 25% to 67% for the “through” funds. The time period that each series takes to arrive at a final asset allocation after the retirement date also ranges widely, from roughly five to 30-plus years. These ranges suggest significant philosophical differences even within a given grouping. AllianceBernstein’s and Goldman Sachs’ target-date series, with stock targets in the high 60s for 2010 funds, clearly have more-aggressive assumptions than, say, Schwab’s, which devotes only 40% of assets to stocks at the same stage.

Josh Charlson is a senior fund analyst with Morningstar.
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