Food for Thought on Evaluating TDFs

The proliferation of target-date funds — not to mention heightened attention to fulfilling fiduciary duties — exacerbates the importance of evaluating them. A recent report suggests things to keep in mind when doing so.

American Funds, part of the long-term investment firm Capital Group, recently outlined ideas for evaluating TDFs in a way centered on participants.

Participant Needs. A plan information audit will aid you in determining the participant data you have and what you need. Once that determination is made, set a plan for how to collect participant data.

Glide Path Construction. Consider the following tips:

• Study the size of stock allocations throughout the glide path.

• Look for a series whose investments in traditional asset classes offer a large degree of diversification, but not at the expense of liquidity and without raising fees.

• Look for options that offer opportunities beyond benchmarks but in a way that controls fees.

• Seek a series that takes an evolving approach to allocations within major asset classes in order to lessen volatility.

• Determine how well a series strikes a balance between risk and equity exposure by identifying a series with a high retirement efficiency ratio, a measure that illustrates a TDF’s amount of equity per unit of volatility and which indicates how the fund balances market and longevity risk.

Value vs. Cost. Analyze TDFs’ fees and the fees of different share classes, and compare TDF series’ returns to the expenses they incur.

Quality of Underlying Funds. Review the persistency of their returns; examine how consistent their strategies and management are; and evaluate how they approach diversification and risk management.

Consistency. Determine how stable the fund’s approach — including its glide path — is; consider consistency and down-market protection when reviewing series results; and assess series management personnel and structure.