PLANADVISER - July/August 2021 - 4

data points //
Set It and Forget It?
TDFs attract increased scrutiny
E
(DOL)
ver since passage of the Pension
Protection Act of 2006 (PPA), after
which the Department of Labor
approved
target-date
funds
(TDFs) for use as qualified default
investment alternatives (QDIAs), plan
sponsors have overwhelmingly chosen
the funds as the QDIA for their plan.
According
to
the
2020
PLANSPONSOR
Defined Contribution (DC)
Survey, 81% of plan sponsors offer a
TDF to their plan's participants, up
from 61% in 2014. But not all targetdate
funds are the same. Their pricing,
underlying investments and risk allocations
vary dramatically from fund
suite to fund suite, as do the assumptions
that go into their glide paths.
Citing these variations, lawmakers
wrote a letter to the Government
Accountability Office (GAO) in May
requesting the office review the funds.
They said that, although TDFs are
billed as offering participants retirement
security-i.e., by placing their
assets in an age-appropriate glide path
that grows more conservative as they
near retirement-the funds might
actually put some participants at risk.
Lawmakers are not the only ones
raising concerns about TDFs. In a
recent
research paper,
" The Unintended
Consequences of Investing for
the Long Run: Evidence From TargetDate
Funds, " academics wrote that
managers of the funds exploit investors'
set-it-and-forget-it mentality.
The paper, which attracted criticism
from other researchers, says
managers do this by delivering lower
performance-for example, 2.9 basis
points (bps), for each year from the
vintage year. An investor holding such
a fund for 50 years at that rate would
Target-Date Mutual Fund Performance, by Objective*
Category Name
In retirement
2000 - 2010
2011 - 2015
2016 - 2020
2021 - 2025
2026 - 2030
2031 - 2035
2036 - 2040
2041 - 2045
2046 - 2050
2051 - 2055
2056 - 2060
2061+
1 Year
10.3%
10.8%
11.1%
12.4%
13.6%
14.6%
15.7%
16.5%
17.0%
17.1%
17.2%
17.2%
16.3%
*Weighted average total return as of December 31, 2020.
Source: 2021 PLANSPONSOR Target-Date Fund Survey
3 Years
6.8%
7.1%
7.4%
8.1%
8.8%
9.3%
9.9%
10.3%
10.5%
10.6%
10.6%
10.6%
10.2%
lose 21% in performance. The authors
attributed " the negative impact on
performance to the fund families using
the TDFs to smooth the flow shocks of
the affiliated OEFs [open-end funds],
as well as to higher fees arising from
investing in the affiliated expensive
share classes. "
Still, Michael Finke, professor of
wealth management at The American
College
of
Financial
Services, was
recently quoted as saying the controversy
on TDFs surprised him, as " most
retirement economists view the use of
TDFs as qualified default investments
as one of the most successful policy
changes that resulted from the PPA. "
Either way, Elise Thiemann, investments
director with Willis Towers
Watson in Chicago, says monitoring
and reviewing TDFs is probably the
most effective decision a fiduciary can
make. For plan sponsors, this is often a
task for which they rely on their adviser.
But benchmarking TDFs can
5 Years
7.0%
7.8%
8.2%
9.1%
9.9%
10.7%
11.4%
11.9%
12.3%
12.3%
12.3%
12.4%
provide unique challenges, Thiemann
says. " That's because the underlying
holdings of the funds vary so dramatically,
and their long-term objectives
mean that short-term performance
is not always the best indicator. For
plan sponsors, the goal is to evaluate
the performance of a TDF's investment
mix, rather than individual asset
classes, " she says.
To aid with this process, the 2021
PLANSPONSOR Target-Date Fund
Survey compiled data from 24 TDF
providers, including details about each
of their fund families' underlying funds,
attributes and assets under management
(AUM); the information is available
for benchmarking on planadviser
.com. The survey also indicates (see
chart) their performance by objective.
According to an analysis of
responses to our 2021 PLANSPONSOR
DC Survey, only 43% of plan sponsors
formally review investments quarterly;
13% do so semi-annually, and
31% annually. -PA
4 | planadviser.com July-August 2021
http://www.planadviser.com

PLANADVISER - July/August 2021

Table of Contents for the Digital Edition of PLANADVISER - July/August 2021

Publisher’s Note
Data Points
Compliance News
Trends
Proposals That Please
2021 PLANADVISER Small-Plan Services Survey: Small Wonders
‘Like’ Me
Building Out Referral Networks
Look Toward The Future
Now A Fiduciary
Cybersecurity And ERISA
Q&A
PLANADVISER - July/August 2021 - Cover1
PLANADVISER - July/August 2021 - Cover2
PLANADVISER - July/August 2021 - 1
PLANADVISER - July/August 2021 - Publisher’s Note
PLANADVISER - July/August 2021 - 3
PLANADVISER - July/August 2021 - Data Points
PLANADVISER - July/August 2021 - 5
PLANADVISER - July/August 2021 - Compliance News
PLANADVISER - July/August 2021 - 7
PLANADVISER - July/August 2021 - 8
PLANADVISER - July/August 2021 - 9
PLANADVISER - July/August 2021 - Trends
PLANADVISER - July/August 2021 - 11
PLANADVISER - July/August 2021 - 12
PLANADVISER - July/August 2021 - 13
PLANADVISER - July/August 2021 - 14
PLANADVISER - July/August 2021 - 15
PLANADVISER - July/August 2021 - Proposals That Please
PLANADVISER - July/August 2021 - 17
PLANADVISER - July/August 2021 - 18
PLANADVISER - July/August 2021 - 19
PLANADVISER - July/August 2021 - 2021 PLANADVISER Small-Plan Services Survey: Small Wonders
PLANADVISER - July/August 2021 - 21
PLANADVISER - July/August 2021 - 22
PLANADVISER - July/August 2021 - 23
PLANADVISER - July/August 2021 - 24
PLANADVISER - July/August 2021 - 25
PLANADVISER - July/August 2021 - 26
PLANADVISER - July/August 2021 - 27
PLANADVISER - July/August 2021 - ‘Like’ Me
PLANADVISER - July/August 2021 - 29
PLANADVISER - July/August 2021 - 30
PLANADVISER - July/August 2021 - 31
PLANADVISER - July/August 2021 - 32
PLANADVISER - July/August 2021 - 33
PLANADVISER - July/August 2021 - Building Out Referral Networks
PLANADVISER - July/August 2021 - 35
PLANADVISER - July/August 2021 - Look Toward The Future
PLANADVISER - July/August 2021 - 37
PLANADVISER - July/August 2021 - Now A Fiduciary
PLANADVISER - July/August 2021 - Cybersecurity And ERISA
PLANADVISER - July/August 2021 - Q&A
PLANADVISER - July/August 2021 - Cover3
PLANADVISER - July/August 2021 - Cover4
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