Taking a fiduciary view on target-date selection

Mike Dullaghan

Mike Dullaghan
DCIO Investment Specialist, 08/04/21

  • To select a target-date fund (TDF) from Morningstar’s database, focus on the glide path.
  • The glide path is a target-date fund’s formula for asset allocation over time.
  • A newly enhanced tool can help retirement plan decision makers find TDFs based on their glide path and document the search process.

With about 110 target-date funds to choose from, how does a retirement plan advisor offer guidance? What about the plan fiduciaries who are personally liable for the selection process?

Yogi Berra, the legendary baseball coach, supposedly once said, “When you come to a fork in the road, take it.” But when you reach a fork in the road to choosing a target-date glide path, random selection is not advisable.

To put you on a better path, we are pleased to announce an enhancement of TargetDateVisualizer®. TargetDateVisualizer allows a retirement plan professional to help plan decision makers examine the underlying asset allocation “ingredients” of 110 glide paths in the Morningstar TDF database. Each glide path is plotted according to its global stock sensitivity (represented by the MSCI All-Country World Index). TargetDateVisualizer® includes an important feature — It measures sensitivity to stocks for a range of savers, including young as well as near-retirement investors.

With TargetDateVisualizer, choices should be easier. To put the magnitude of glide path choices in perspective, it has been estimated that a well-known national coffee chain offers more than 87,000 possible drink combinations when their menu and special “off menu” choices are combined. When faced with so many options, it is easy to select one or two “go to” choices and ignore the rest.

When it comes to target-date construction, asset classes are the ingredients. Mixing them together is called asset allocation. But what’s the recipe? The glide path. It determines the mix, and it aims for the right amount of risk depending on where an investor is relative to his/her investment time horizon. This is known as a strategic glide path. But it varies from manager to manager.

Many to choose from

While the drink combination search cited above yielded about 87,000 results, the Morningstar database contains about 110 mutual fund and collective trust TDF glide paths that have long enough track records to be included. (A minimum  3-year track record. As of 3/31/21; updated quarterly). The range of glide paths is smaller, but it can still be potentially overwhelming for advisors and sponsors.

With so many choices, it may be tempting to take a shortcut and select a TDF based only on 3- to 5-year results or on brand name recognition. This would be like picking a car based on how shiny its paint is without knowing anything about its other features. It might look good on the outside, but it lacks the qualities that will make you want to keep it for the long term. To avoid adverse outcomes, knowing glide path features and how these features are combined are crucial in TDF selection.

Drilling down

The concept of strategically allocating assets appears to date back to 500 A.D. At that time, the process referred to land, merchandise, and liquid assets. The value of understanding asset allocation to determine the difference in performance of two portfolios is in the topic of a 1995 paper, “Determinants of Portfolio Performance.” This paper “asserted that asset allocation is the primary determinant of a portfolio’s return variability.” Follow-up research by William Jahnke added that, “Investors should be more concerned with the range of likely outcomes over their investment planning horizon than the volatility of returns.” Jahnke went on to warn, “Fixed asset allocation solutions are inferior to analytically linking forward-looking strategic asset allocation solutions . . . As the investor’s circumstances or market opportunities change, so also should the investor’s asset allocation.”*

The work cited above, along with additional research, serves as the foundation of the idea that investors are better served “gliding” along a strategic path during their working and investing lives rather than being anchored to a set allocation regardless of circumstances.

TargetDateVisualizer may help retirement plan decision makers examine the underlying asset allocation “ingredients” of 110 glide paths in the Morningstar TDF database.

Using the tool, the TargetDateVisualizer universe of glide paths can be narrowed by answering three basic questions about the plan sponsor’s preferences for each end of the glide path and their definition of TDF “success.” This process will lead to a filtered choice of paths that share the characteristics the sponsor is looking for. From the filtered list, a subset of TDFs can be selected for additional analysis.

In recognition of the DOL Target Date Tips, this process  is  then thoroughly documented in a plan-sponsor-approved TargetDateVisualizer Analysis report. In addition, a variety of risk/reward and asset class weighting and return contribution information is provided.

If you know the ingredients and how they are combined before selecting a TDF, you have better odds of reaching your desired outcome than if you choose based on recent results. TargetDateVisualizer® can help you better understand the TDF asset classes and strategic glide paths that you are considering.

try targetdatevisualier

*Enterprising Investor, David Larrabee, CFA Institute, February 2012.

The MSCI ACWI (All Country World Index) Index (ND) is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global developed and emerging markets. You cannot invest directly in an index.