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TDFs to evolve, though. Much of the
growth happened during a rally in equities
markets, experts say. That 10-year
bull market prior to the pandemic helped
to bolster investor portfolios. But now the
market has shifted, raising new questions
about whether glide path allocations are
well positioned to manage the changes.
Demographics are driving change
too. Many of the earliest TDF investors
are at or near the end of their glide path
and recognizing the need to preserve
capital and find retirement income
solutions. Sources say these factors are
prompting more plan sponsors to take a
fresh look at their TDF offerings to make
sure those meet participants' needs.
Take the Long View
Whenever market regimes shift, investors
and plan sponsors may be tempted to
make big structural changes to how portfolios
are set up. However, Brian Miller,
West Chester, Pennsylvania-based senior
investment specialist at The Vanguard
Group whose focus is target-date funds,
notes that the funds are designed to have
a 70-to-80-year time horizon, and the
portfolio design is meant to withstand
changes in the market over that time.
He says the smarter route is to evaluate
performance-but take the long view
when it comes to making changes.
Vanguard's Target Retirement Series
is now 20 years old. Miller says that over
the next five to 10 years, plan sponsors
could see more support for personalization,
education and income.
" We've made a lot of progress with
auto-enroll and other tools, " Miller says.
" What you see now in target-dates is a
majority of investors who use the default
settings. I think the next phase is going to
involve crafting an education and personalization
strategy that plan sponsors can
use to engage participants.
" Internally, every year we do a full
revalidation of our target-date series
to make sure our glide path and asset
allocation continue to be appropriate
for a broad group of investors, " Miller
says. " Plan sponsors can do something
similar. They can evaluate the series
and make sure it's still a good fit for the
needs of the plan. But it's also important
to keep the time horizon in mind. Plan
sponsors want to make sure they aren't
overreacting to short-term changes in
the market, because
these
funds are
designed to be durable portfolios. "
Kelly Campbell, director of multiasset
solutions for Capital Group in Los
Angeles, agrees. She says changes such
a specialist in target-date funds, says inflation
is one area that can expose problems
with risk management in TDF portfolios.
" Risk management in a lot of targetdate
funds is incomplete and, in my
opinion, somewhat weak, " Pellerin says.
" You can find very high equity exposures,
which can be risky.
I'm often
surprised by the lack of inflation protection
as well. " TDF allocations to Treasury
inflation-protected securities or other
inflation-hedging tools are often very
Many of the earliest TDF investors
are at or near the end of their glide
path and recognizing the need to
preserve capital and find retirement
income solutions.
as higher inflation or increased volatility
can highlight gaps in an investment
process or the need for more robust risk
management, but they rarely indicate a full
plan overhaul.
" I think if you see a series of funds
that have significant underperformance
over a period of time, it's worth taking a
closer look because that could be symptomatic
of a broader problem, " she explains.
" But, ultimately, these are funds that are
meant to be evaluated over several different
market cycles before making a move. We've
already seen something like that play out.
Investors [were] doing well [in 2023] after
a more volatile 2022. So they [were] being
rewarded for staying the course. "
One area where plan sponsors may
want to focus their attention, if they have
not already, is on inflation protection.
While headline inflation has started to
recede, it is still higher than it was even five
years ago, and that can have an impact on
target-date funds.
Mathieu Pellerin senior researcher
and vice president at Dimensional Fund
Advisors in Charlotte, North Carolina, and
low, he says, and it can be difficult to
make adjustments after the inflationary
period has occurred, which can lead to an
erosion in expected returns.
Vanguard's Miller says inflation
protection adjusts over time as an investor
moves through the glide path. Within the
Vanguard series, there are allocations to
shorter-term TIPS up until the person
turns 60, for example. This gives investors
some measure of protection while
they are still many years from retirement.
Allocations to inflation-protected
investments start to increase at age 60,
Miller notes.
" We want to make sure we're
providing the right balance, " he says. " Even
if an investor is close to retirement and
therefore more vulnerable to rising inflation,
you want to know you aren't harming
the person in other ways either in terms
of downside risk mitigation from market
movements or by adding to longevity risk
by focusing too much on inflation. There
are many risk factors that can affect a portfolio,
depending on where [people are] in
their glide path. " -Bailey McCann
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