Target-date funds (TDFs) are now so commonplace—found in up to 80% of defined contribution (DC) plans, according to some estimates—that it is difficult to remember how long they took to gain acceptance. Seven years after they were introduced in 1993, there were still only a handful of fund suites in the market. This slow uptake did not surprise Chip Castille, currently head of BlackRock’s U.S. and Canada DC business and a member of the original team that created the first target-date fund. “They were really revolutionary,” explains Castille. “The idea that you could manage asset allocations for a large group of people based on their time to retirement was a radical departure from what was done in the past.”
The number of target-date fund suites available today, and the asset flows into these funds, suggests that the revolution has been won. PLANSPONSOR spoke with Castille; Larry Tint, chairman of Quantal International, senior managing director and partner at Cantor Fitzgerald and former U.S. CEO of Barclays Global Investors; Sue Walton, director, Towers Watson Investment Services; and Marcia Wagner, of The Wagner Law Group, about the lessons learned from 20 years of target-date funds and the challenges for the future.
PS: What was the problem you were solving for when you developed the first target-date fund?
Tint: Most 401(k) investors, at the time, steered by using their rearview mirrors and moved into asset classes that had recently done well. Most investors were afraid to pull the trigger, to leave an asset class that had performed well and to reallocate into one that hadn’t. They didn’t really understand the way the long-term investment decision process should evolve.
So we came up with the idea of creating a fund that would make decisions for the individual and leave him free to focus on the time horizon and risk level that were appropriate.
I had just finished a business partnership with William F. Sharpe, where we acted as investment managers and asset-allocation specialists for large pension funds. In 1990, after Bill won the Nobel Prize in economics, he continued to consult, and I joined Barclays Global Investors, which is now BlackRock, so that I could manage money based on the research we had conducted.
I wanted to be able to provide the same kind of quantitatively correct and focused asset allocation to individuals that we had provided to corporations through Sharpe-Tint. We had developed technology around planning horizons and appropriate levels of risk that morphed the portfolio through time, and I wanted to be able to provide a similar structure to individuals. Commingled funds geared to specific target dates allowed us to provide that structure inexpensively to DC clients.
Castille: At the time, most investors created an asset allocation and changed it in response to the market or, at best, predicted changes in the market. Obviously, this is a challenge even for experienced investment managers. But, with the increased focus on DC plans, that is exactly what we’re asking people who did not have the insight or interest to do. Target-date funds reduced a complex array of investment questions to one simple question that most 401(k) participants could answer: When do you need the money?