How Do You Compare Target Date Funds?

Target Date funds have grown in popularity over the last decade especially inside employer benefit plans such as 401Ks.  On the surface, they all seem to be exactly the same.  First, you pick your fund based on your anticipated retirement date.  Then you let the manager handle the rest – they utilize their glide path and make the portfolio more conservative as you approach retirement.  While true, behind the scenes there are subtle differences that investors should be aware. Here are a few examples:

• ·There are no hard and fast rules regarding what your initial allocation will be for a given target date, how it will become more conservative, and where it will end up.  You should be aware of the manager’s approach to these items. 

• Is the fund actively or passively managed?  Does the manager set the allocations in advance and follow them regardless of market conditions or do they try to make tactical adjustments to take advantage of miss-pricings they perceive in the market?

• What does the fund invest in? 

  • Are there mutual funds, exchange traded funds (ETFs) or collective investment trusts (CIT) under the hood?

  • Are these funds actively or passively managed, or are they a blend?

• Does the fund employ a particular objective outside of the risk/return framework?  For example, does it have an ESG tilt?

• Does the fund have any unique features such as a managed payout or annuity option?

Each of the items above could also impact the internal cost or expense ratio of the fund, so it is important to know what you are paying and whether you are getting value in return.

To shed some light on these variables, below is a chart of 5 actual funds that are all called 2040 Target Date Funds.  To keep things simple, we are highlighting the differences that exist for one variable, current asset allocation.  We then include the corresponding performance and expense ratios. 

It is important to note we only know the allocation at a point in time.  How the allocations have evolved and continue to evolve will continue to be different among the funds and will continue to impact the performance results.  What we can highlight from this table is that target date fund managers have quite a bit of flexibility on the asset allocation of their fund’s portfolio. 

You will note that while each of the 2040 Target Date funds listed in the table technically have the same investment objective, they are executed differently.  This means that each target date fund has varying risk/return parameters.  For example, Fund A has a stock allocation of 75%, whereas, Fund B has a stock allocation of 88%.

At the end of the day, it is hard to make an apples-to-apples comparison among Target Date Funds without considering all the moving pieces.  Remember, managers want their fund to stand out to potential investors and the most apparent way to do so is to try and enhance returns by making adjustments to some or all of the underlying investments, especially the stock/bond mix.  It is important to know what measures portfolio managers of target date funds are taking and whether that is appropriate and right for you.

The team at Beacon is ready to help you decide not only if a Target Date Fund is right for you but which to choose based on the fund’s approach to target date investing.