Participants Are Saving More With ‘TDF-Plus’ Strategies

A new study finds participants who blended funds were on track to replace more of their pre-retirement income than those who did not.

While prior reports have warned against mixing target-date funds (TDFs) with other investments, a study finds participants who did so were on track to replace more of their pre-retirement income.

John Hancock Retirement’s 2021 “State of the Participant” report says more than one-quarter of TDF investors older than 30 are mixing investment types to create what could be called “TDF-plus” strategies. The report notes that TDF strategies were not originally built to be mixed with other investments or assets, and it cites a 2019 Morningstar study that suggests mixing them with other types of investments will inevitably alter the target-date manager’s intended allocation.

In an August 2019 report, David Blanchett, head of retirement research at Morningstar Investment Management LLC, said, “Combining target-date funds with other investments may not seem problematic at first glance, [but] it can diminish (or eliminate) the target-date fund’s potential benefit.”

However, John Hancock Retirement’s analysis found that participants who had blended funds were on track to replace 89.6% of their pre-retirement income, compared with those who held TDFs only, at 84.8% of their pre-retirement income. The study also suggested that a larger percentage of TDF-plus investors were retirement ready (59%) than TDF-only investors (51.7%).

“This isn’t a recommendation to randomly combine other types of funds with TDFs, nor is it a guarantee that a TDF-plus approach will outperform any given TDF,” John Hancock Retirement says in its report. “However, the evidence seems to show that with appropriate education and guidance, participants can potentially have success with a ‘TDF-plus’ approach to asset allocation.”

The firm recommends plan sponsors implement ongoing communications throughout the year to educate participants on managing long-term investments during market volatility, and to “make personalized investment advice readily available, on each participant’s terms, to help with overall investment approaches and asset allocation.”