Target-Date Funds: Choosing Them Wisely

December 16, 2013 ( – Target-date funds (TDFs) have become an integral part of many defined contribution plans.

Since the first TDFs were introduced in 1994, and the 2006 Pension Protection Act granted safe harbor for plan fiduciaries using TDFs as a Qualified Default Investment Alternative (QDIA), more than 50 fund families have developed TDFs, and the number is growing.  It is a common misconception that TDFs are all alike. They are very different in their makeup and design.

In February 2013, the Department of Labor issued guidelines for TDFs, “Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries,” which urged plan sponsors to analyze their TDFs, and compare and document the selection process (see “EBSA Offers Tips for Selecting TDFs”).  With more than 70%  of plan sponsors using TDFs as the default investment option, it is up to the plan sponsor, with the help of its adviser, to understand the differences and select the most appropriate TDFs  for its plan.*

However, with more than 50 different TDFs to compare, how do you select the most appropriate TDF series for your retirement plan? 

Here are variables and items to consider when selecting an appropriate TDF:

  • Performance of 10 or more different retirement date specific funds;
  • Glide paths both “to” and “through” retirement;
  • Number of asset classes used to make up the TDF and the underlying funds that represent the asset classes;
  • Actively versus passively managed funds;
  • Open architecture design; and
  • Expense ratios.

When analyzing a complex problem with multiple variables, it is important to investigate each variable and develop a screening process to determine their impact on the overall performance.  For TDFs, the ten steps listed below can be used to analyze different TDF products, and determine and document the most appropriate selection for a retirement plan.

1.     Remove all the TDFs that don’t have three or five years of documented performance, or the minimum indicated in your investment policy statement (IPS).  This simple screen will eliminate a number of the TDFs offered. 

2.     Determine if your plan rules allow participants to stay in the plan after retirement, which would make a “through” retirement TDF appropriate.  If your plan requires participants to remove their balance at a specified age, usually normal retirement age, a “to” retirement TDF would be appropriate.   This process eliminates even more TDFs.

3.     Eliminate any provider duplication of TDFs.  For example, some TDF providers offer multiple variations of their TDFs.

4.     This goes back to one of the basics:  Diversification is essential.  While it does not protect against market risk or guarantee that the portfolio will enhance overall returns or outperform a non-diversified portfolio, it does spread a participant’s investment across more asset classes in the event one (or more) of the asset classes underperforms the  market.  With the help of your adviser, select a minimum number of asset classes (or underlying mutual funds) you want to make up the TDFs.   

5.     Determine whether the underlying investments are actively or passively managed, or a combination of both.  Also, decide if this is an important factor in your selection process. 

6.     This is a fundamental part of fund selection: Open architecture.  An open architecture TDF fund manager uses funds from a variety of investment companies, where a closed architecture TDF fund manager generally uses proprietary funds or funds from an affiliate.

7.     Analyze the glide path.  Glide path is the term used to describe the shift in asset allocation a TDF will make over time.  The focus is on the rate of change and the timing of the change in allocation.  The largest diversion in the asset allocation, from fund family to fund family, occurs in those funds closest to today’s date.  At this point, you can eliminate the TDFs whose glide path is too aggressive or too conservative.  

Once you have completed these seven steps, the selection should be reduced to a handful of TDF providers.

8.     Review the overall performance on the one-, three- and five-year basis or longer if available.  Since retirement savings is long term investing, I suggest focusing on, at a minimum, the five-year numbers. 

9.     Place a higher degree of importance on those funds within 15 years of retirement.  As participants reach their retirement date, they have less time to recover from a market downturn. You want these funds to be consistent and have less market risk. The amount of equities held varies widely in the 2025 funds than those funds closer to today’s date.  The 2030 funds and further away from retirement, hold a consistently high content in equity funds. At this point, for example, you could exclude a 2015 fund that allocates too much or too little to equity based funds. 

10.     Look at which TDFs have the lowest expense ratios.  This is another simple and consistent tool for evaluation that can be documented.


You started with a large number of TDFs.  Completing these steps, you have narrowed the field to the options that are most appropriate for your plan.  You have a documented process for your selection and how you made that decision.

In selecting new TDFs, or to determine if the TDFs you already have are appropriate, the first step is to decide how you want your TDFs to be used in the plan.  Then screen the TDFs that meet your criteria and document the results.  In making any investment decision, it is key to document the series of decisions that lead you to the funds you have selected. 


Robert A. Kieckhefer with the Kieckhefer Group in Brookfield, Wisconsin. You can contact Robert Kieckhefer at (262) 784-0754.  Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.

*The Profit Sharing Council of America’s 55th Annual Survey (“PSCA Survey”).

The" target date" of a target-date fund is the approximate date when investors plan to start withdrawing their money. The principal value of a target fund is not guaranteed at any time, including at the target date.

There is no assurance that the techniques and strategies discussed will yield positive outcomes for your retirement plan. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any retirement plan. To obtain advice as the plan sponsor of your retirement plan, please consult your financial adviser.


This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.