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The Challenge of Choosing Target-Date Funds

Morningstar Staff

 

Target-date funds have been a boon to plan sponsors because they can be simple, relatively cost-effective options to help employees save for retirement. Once a target-date series has been selected, it’s easy for the employee to get invested in an appropriate fund without worrying about complex investment decisions.  

When Choosing Target-Date Funds Gets Tough 

A plan sponsor can sometimes get tripped up in choosing a proper target-date series. There’s a tendency to focus on tangible items, such as cost and whether the fund favors active or passive management. But a plan sponsor shouldn’t overlook details about the fund’s glide path. That’s the adjustment to the equity allocation over time. And how the glide path is designed and whether it’s suitable for the plan’s participants are important to think about. 

Acknowledging the Easy Option 

For many plan sponsors, choosing target-date funds has been as simple as accepting their recordkeeper’s target-date product. A 2015 study by CapTrust Advisors found that 45% of plan sponsors used the series of target-date funds offered by their recordkeepers. In fact, six of the 10 largest recordkeepers are also the largest providers of target-date products. That’s a surprising statistic given the number of products available to plans. 

Balancing Price Against Suitability 

Price doesn’t always trump suitability. Focusing on price can lead to a potential mismatch between the equity glide path of the fund and the glide path that would work best for the specific demographics of the plan participants. Glide-path appropriateness is one of the most important aspects of selecting the target-date funds that best suit plan participants. Above all, consider quantitative frameworks and put participants first while making the selection. 

Read our full white paper to learn more about using employee data to select the right target-date fund. 

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