According to a Russell announcement, the paper outlines 12 observations about target-date funds that highlight for plan sponsors how traditional fund evaluation approaches fall short as the funds can look the same on the surface but differ dramatically in underlying investments. The paper is authored by Josh Cohen, senior consultant.
In summary, the announcement said, Cohen’s 12 observations are:
1. Target-date funds should be designed with the objective of achieving greater certainty of retirement income replacement; asset accumulation is only one part of that.
2. Glide paths generally slope down because of the pattern of contributions, not because of time horizon.
3. Risk should be measured in terms of not meeting retirement objectives.
4. There should be high equity allocations at the beginning of the glide path.
5. There should not be high equity allocations at the retirement end of the glide path.
6. There is no clear investment rationale for the glide path to continue to slope down after retirement.
7. Target-date solutions should provide diversified sources of return.
8. Passive should not be considered the safe choice.
9. Proprietary managers face headwinds.
10. Building a custom target-date fund is harder than it sounds.
11. Take care with performance comparisons.
12. Target date funds cannot solve all of a plan’s problems.
More information is available at www.russell.com/dcinsights .
PLANSPONSORalso offers help in evaluating target-date funds via its interactive buyer’s guide at www.plansponsor.com/lifestyle and recently updated analysis of target-date fund families at www.plansponsor.com/targetdate .