PD08: Benchmarking Target-Date Funds

The target date space is evolving rapidly," said Jeb Graham, Retirement Plan Consultant at CapTrust; "I think that from a benchmarking standpoint we're at the same place 401(k)s were 12 - 15 years ago… where there really wasn't a lot of benchmarking done on the investments."

With Charles Ruffel, CEO of PLANSPONSOR , to lead them through a discussion group at PLANSPONSOR’s Plan Design Conference in Chicago, Jeb Graham, Regional VP at Nationwide Financial, Kamila Kowalke, Business Development Director at Dow Jones, and Joe Nagengast, Principal at Target Date Analytics LLC, discussed the methods and difficulties facing plan sponsors who wish to benchmark asset allocation solutions.

align=”center”> The Panel Audio File

“Where we are now is at a point where it’s time to go back to the policy-the investment policy for the plan or plans-and flesh out what you had said or . . . determining the objective of target dates in your plan,” said Nagengast. He stressed the importance of plan sponsors understanding their client demographic and what would benefit their plans most.

Only after goals had been clarified did Nagengast recommend establishing the allocation, selecting or building a series of funds.

Kowalke agreed, saying that the glide path (See Moving Target ), which Nagengast described as the “dynamic face” of the asset allocation, is critical, and its selection and implementation processes must be carefully measured. Nagengast suggested investigating important underlying components to confirm a fund’s goal, while Kowalke believed it was important to consider the real-world implications of a fund’s investments.

Nagengast said that when contracting with a provider, plan sponsors should agree what their objective is, and then establish how the glide path will be assessed in terms of its probable ability to achieve that end, with outlined results and predictions provided for clarification and both parties’ records.

Because clients look to plan sponsors and advisers to supervise and control the risks associated with fiduciary management of their plans, said Graham, they are more likely to sue if their advisers cannot justify their fund selection than if a suite of carefully-chosen funds underperforms compared to the benchmark.

Kowalke explained that she believes a glide path is representative of that fund's creator's or provider's asset allocation philosophy, which is, in turn, indicative of and critical to the long-term performance of that fund.

Graham admitted that committees have not, as of yet, significantly documented or assessed glide paths, so it is especially important that sponsors be confident in their decision. Kowalke said that finding a viable benchmark can provide not only valuable information to compare with your own choice, but also offer an investment alternative if necessary.

Kowalke admitted that benchmarking a glide path can be extremely difficult, saying, "It's not just about the performance of each asset class separately, and measuring that, but about measuring the mix." It's important to advise participants and make sure to follow a prudent practice-and therefore, hopefully avoid lawsuits.

However, despite the necessity of keeping clients well informed, Ruffel said, "We better not think that education is the solution to our retirement societal issues going forward, I think the solutions lie in the hands of educated plan sponsors more than participants."

No matter how well-informed participants and their sponsors are, there is no guarantee that a glide path will be successful. "Ultimately," said Graham, "the plan sponsor is just going to make a leap of faith."

- Sara Kelly