As Target Date Fund (TDF) demand has grown, so has supply. With the abundance of TDF suite options now being provided by fund companies, plan sponsors need to have a clear understanding of which type of TDF suite may best suit their plan and its participants.
The most common distinction between competing TDF suites is a comparison of their glide path – or the length/velocity of the downward shift in the TDF’s allocation to equity investments. There are two types of glide paths named for their distinct philosophies pertaining to what takes place once the target date is reached. Under a “to” strategy, the asset allocation glide path freezes once it gets to the target date. Under a “through” strategy, the glide path continues through the target date for another 10-25 years.
So, when choosing a TDF, it is important for plan sponsors to decide whether a “to” glide path strategy or a “through” glide path strategy is more appropriate. One strategy is not obviously better than the other – in fact, in terms of popularity, there is a nearly even split between plans offering TDFs that employ a “to” glide path and TDFs that employ a “through” glide path. While the choice between a “to” or a “through” glide path strategy can be quite nuanced, we believe there are two primary considerations when deciding between them:
Once plan sponsors consider these issues, they will be better positioned to determine which TDF glide path strategy is best for their plan. However, they must remember that even TDFs with the same style can be significantly different. For this reason, when deciding on an appropriate strategy, plan sponsors may be well served to also consider important factors such as TDF architecture (open vs. proprietary), risk management, and sub-asset class exposures.
The material presented in this newsletter is of a general nature and does not constitute the provision by PNC of investment, legal, tax, or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy.
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