Each year, PEI conducts a comprehensive review of the glide paths utilized by the leading industry providers of Target Date Fund (TDF) strategies. We base our analysis on responses to our Request for Information (RFI) distributed to these providers. The RFI responses, along with our regular due diligence meetings and calls, give PEI a great deal of insight and granular detail on the glide paths (exposure to various asset classes over time) of these TDF providers. This analysis also helps us to identify important trends and investment themes in the TDF industry.
Target date fund glide paths remained relatively unchanged over the past year as providers continued to focus on fee reductions and product development. However, we did observe the average allocation to risk assets pre-retirement ticked up slightly by about 50-100 basis points. As well, a few providers recently extended their glidepath further into retirement, which led to a slight decrease in the post-retirement averages for risk assets.
While glide paths overall have not materially changed over the past five years, there has been a shift in the underlying asset class utilization. A number of firms have increased their exposure to international equities with the intention to further enhance diversification and their assessment of attractive valuations relative to domestic stocks during this period. Generally, providers have also increased the diversification within their fixed income allocations. These two changes have been partially sourced from a slight reduction in domestic equities. Also, we found that several firms have either reduced or eliminated their exposure to commodities within their glide paths.
Overall, the main trend within the TDF asset class continues to be the focus on reducing fees. Increased competition in the industry has led to continued fee reductions across all versions of target date funds. For the last several years, PEI has had discussions with TDF managers about the impact cost considerations have on diversification decisions. Some actively managed suites of TDFs have utilized passively managed strategies to either reduce costs or to improve diversification in other parts of the suite without impacting fees. As part of the increased competition, many firms have reduced or even waived minimum investment requirements to gain access to collective investment trust (CIT) versions of their strategies. However, from a fiduciary perspective, it remains important for plan sponsors to benchmark their product’s cost based on the type of strategy and relative to the value the funds are providing.
The increased prominence of hybrid TDFs (products that utilize a mix of both active and passive underlying funds) has directly benefited from an increased focus on fees. These funds have gained in popularity due to the balance between cost and diversification, however there is a wide variation of passive utilization within the space. Overall, passive exposure within hybrid TDFs varies widely from 30% – 70% on average across their glide paths. Most firms utilize greater amounts of indexed exposure within domestic equities, specifically large-cap stocks, while fixed income allocations conversely tend to be comprised of mostly actively managed strategies.