Date versus Risk-Based
There are two basic types of asset allocation funds generally available. The asset allocation mix of risk-based funds is generally determined based on an assessment of individual risk tolerance, frequently with the assistance of some type of risk tolerance questionnaire. Risk-based funds are also referred to as “lifestyle funds”, since they generally carry names that correspond to different risk profiles, such as “conservative”, “moderate,” or “aggressive.”
The asset allocation mix of target-date funds is, as the name suggests, based on a date – most typically described as the year in which the investor will retire, but more accurately the year in which they plan to start withdrawing money. Target-date offerings have typically come in 10 year increments (2010, 2020, etc.), but have more recently been offered by some in five-year increments. Date-based funds are generally referred to as lifecycle funds.
For more about the differences between the two, see One Size Does Not Fit All
Here the distinction has been reduced to three;
- “proprietary”, meaning that the fund is composed of offerings that are managed by the same firm that offers the asset allocation fund,
- non-proprietary”, which indicates that the underlying components are generally composed of the offerings of external fund mangers, and
- “Other” which includes portfolios that are composed of individual securities, or some kind of hybrid structure.
The choice of underlying funding can impact both the fees, and potentially the availability of a track record for the investment.
The definition employed in the Buyer’s Guide is a fee specifically attributable to the asset allocation process, a fee charged for “wrapping” together the underlying fund mix and/or determining what that appropriate mix is, on an ongoing basis. These fees are generally only applied to offerings composed of mutual funds.
The share class is generally used to differentiate between investors/plans of different sizes, and has a direct applicability on the fees applicable to the investment (institutional, or “I” shares generally being the least expensive). It is, however, a term generally applied only to mutual fund investments. The share class(es) available to your plan will vary based on the size of your program and the providers involved. However, you should always inquire as to the class available, and what dictates/drives that availability.
For more on the impact of share class on your investment, see: What You Don’t Know Can Hurt You
While the external design of an asset allocation fund is important, its internal construction can have a tremendous impact on its flexibility and cost. Specific categories recognized here are (a) mutual fund, (b) collective/commingled fund, (c) separately managed accounts, and (d) other. The latter category includes individual securities, exchange-traded funds, and combinations of the above.
If there are additional points on which you would find clarity useful – or other questions/comments on these explanations, please email me firstname.lastname@example.org