PLANADVISER - July/August 2017 - 11

From an investment due diligence
perspective it will be important to evaluate
whether the philosophy of your TDF
manager has evolved since selection. Has
the glide path asset allocation changed
meaningfully? Are longevity, market
and inflation risks being appropriately
addressed? Has the manager experienced
organizational, process or investment
team changes? These are some of the questions
that can help determine whether the
manager's philosophy has changed.
The third element is the actual benchmark,
and this is where it gets pretty tricky
in the target-date space. Benchmarking
is critical in monitoring TDFs, yet it is a
challenging exercise. In the target-date
space, every glide path is unique; some
de-risk less over time, others more over
time. Some emphasize longevity risk,
others market risk. The wide variety of
TDF approaches makes them very difficult
to benchmark.
The fourth and final step requires
sound documentation of the process
for monitoring TDFs. From a fiduciary
standpoint, the DOL says it is important
to document the process.
PA: Benchmarking TDFs
is clearly a
topic we continue to find challenging as
an industry. Why is benchmarking TDFs
so difficult?
Bentley: TDFs are not a simple, singlesleeve
category like a large-cap equity
fund, for example. The mix of assets in a
TDF, as well as the shape of the glide path,
will be quite different across the universe
of target-date providers, making peer
group comparisons difficult. When we
asked advisers, " How are you approaching
this? Which benchmarks are you using? "
we were able to identify five different
approaches to benchmarking. Our TDF
monitoring roadmap spells out the rationale
behind each of these approaches:
The most common benchmark
compares the performance of the TDF to
its own strategic glide path. This approach
allows an adviser to judge whether or not
the manager is adding value above and
beyond the glide path.
A second approach focuses on riskadjusted
returns rather than absolute
performance. Top adviser teams often
focus on Sharpe and Sortino ratios.
A third approach focuses on perforJamie
Bentley
mance of the underlying funds, or the
building blocks of the glidepath, with a
special emphasis on fixed income asset
classes. A consistent theme we heard
from advisers centers on the critical
nature of the fixed income portion of the
glide path, because older participants
generally have larger balances and represent
the largest percentage of plan assets.
These participants have less time to make
up for negative return events. This makes
fixed income components more critical
than equity components in the glide path.
The
fourth approach
establishes
a custom benchmark. This is simply
an adviser or consultant constructing
something comparable to the glide path,
and measuring performance and alpha
drivers. Additionally, the investment
manager may create a custom benchmark
for comparative purposes.
The fifth approach considers benchmarks
of industry peer groups. This is the
least complicated tactic but may be flawed
due to the challenges described above.
Even if one tries to segregate TDFs funds
into aggressive, moderate or conservative
buckets, philosophies and approaches
still vary widely.
PIMCO has tools to help advisers
think differently with respect to benchmarking.
GlidePathAnalyzer is a tool that
employs forward-looking benchmarking
techniques to help assess the probability
of meeting important plan goals such as
income replacement, or cash flow needed
in retirement.
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PA: When monitoring TDFs, how does
an adviser know when it is time to make
a change? How much leeway do you give
a target-fund manager if they're not
meeting expectations?
Bentley: The protocol would be similar
to assessing the core menu. The investment
policy statement [IPS] helps determine
issues that need further scrutiny
or watch-list status; it dictates how much
latitude to give to an underperforming
manager. Ideally, the IPS should have
general guidelines for when to put a fund
on watch. For example, it could be a failure
to meet performance standards for two
or three consecutive quarters, or material
changes to the glide path. But the
language shouldn't be so rigid that one is
locked into a decision that closes the door
to committee discretion and consideration.
For example, a conservative target-date
manager may have underperformed in a
" risk-on " market but the committee still
prefers the conservative approach.
My final point is that PIMCO stands
ready to help advisers with the challenging
task of benchmarking-not only for the
core lineup but TDFs as well. While many
plan sponsors have a process for thorough
monitoring of their core lineup, fewer
have access to systematic tools for benchmarking
TDFs, a more complex undertaking.
We believe PIMCO's Target-Date
Monitoring Roadmap can be a valuable
resource for advisers and their clients. ■
This material contains the current opinions of
the author but not necessarily those of PIMCO
and such opinions are subject to change without
notice. This material has been distributed for
informational purposes only and should not
be considered as investment advice or a recommendation
of any particular security, strategy
or investment product. Information contained
herein has been obtained from sources believed
to be reliable, but not guaranteed. No part of
this material may be reproduced in any form,
or referred to in any other publication, without
express written permission. PIMCO is a trademark
of Allianz Asset Management of America
L.P. in the United States and throughout
the world. Pacific Investment Management
Company LLC, 650 Newport Center Drive,
Newport Beach, CA 92660, 800-387-4626.
©2017, PIMCO
PLANADVISER - July/August 2017

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