PLANSPONSOR - October-November 2022 - 18

INVESTMENTS |COVER STORY
Moreover, according to the 2021 PLANSPONSOR Defined
Contribution Survey, 75.6% of respondents overall use a TDF as
their default investment for automatic enrollment.
Interest in managed accounts, however, is growing in the
industry. The reason is, managed accounts allow for customized
asset allocation. Age and age-based risk tolerance are generally the
only factors that determine asset allocation in target-date funds.
In contrast, managed accounts can act to maximize participants'
retirement readiness, because these funds can offer greater
personalization of investment options and tailored advice, says
Joni Tibbetts, vice president for management, retirement and
income solutions at Principal Financial Group in Des Moines,
Iowa. " An employer can consider several factors such as participant
age, compensation level, plan contribution rate, [and, more
broadly,] automatic enrollment percentage, turnover and distribution
activity, " she says.
" The employer, of course, needs to evaluate the cost of
the QDIA option and its performance, but it's really key for the
plan fiduciary to also understand the differences between the
options, the asset classes and how this all really might change
over time, " says Tibbetts, " because it's really important that a
fiduciary selects the best option upfront. " -Noah Zuss
Navigate Around Volatile Times
How target-date funds can help handle market uncertainty
I
t has been a rough year for the performance of most targetdate
fund families. " Generally, they cluster in their performance, "
says Kerry Bandow, head of defined contribution
solutions at Russell Investments in Seattle. " Misery loves company,
and [target-date fund families] are experiencing similar
[negative] returns. "
There is no doubt that this year has been a particularly tough
market for fund managers, Bandow says. " So, for the first time,
some plan committee members will see negative numbers for
the full year in the performance of their target-date funds. " He
says he hopes this does not lead committees to make a panicked
change in their plan's TDFs. " But, " he adds, " I do hope this is
a reminder that there's a need for an ongoing close look at the
target-date manager, and that requires a look at the glide path
structure and investment philosophy. "
Megan Pacholok, manager
research analyst who leads
target-date fund research at Morningstar Research Services
LLC in Chicago, declines to speculate on whether more plan
sponsors may consider switching TDF families due to recent
performance and volatility. " When plan sponsors are picking a
target-date fund family, they should consider the long term and
what could happen, and what their participants would prefer in
a down-market, " she says. " Are they a more risk-averse group
so the sponsor should pick a more conservative target-date
family? Or are they more comfortable with risk so the sponsor
should pick a more aggressive target-date family? The decision
wouldn't necessarily change because of the recent market
activity, because the sponsor should have already taken that
[risk preference] into account. "
18 PLANSPONSOR.COM October - November 2022
A fiduciary needs to deeply understand the investment
philosophy and the glide path of the plan's target-date funds,
says Maddi Dessner, head of global asset class services at Capital
Group, home of the American Funds Target Date Retirement
Series, in New York City. " It's not just how much equity and how
much fixed income is in the funds but which equities and fixed
income, " she says. " And it's not just about whether the manager
can add value in upmarkets. It's also about getting out of the
way of challenging markets. That's critical for investors who are
looking for that [steady] retirement 'paycheck.' "
Tactical Allocations' Pros and Cons
Some TDF families allow for a limited percentage of the portfolio
to be invested in tactical allocations; this will permit managers
to stray slightly from the glide path and target allocation in
response to the shorter-term market outlook over the next few
years. Among the TDF families that have a tactical allocation
are BlackRock's LifePath Dynamic target-date series, Fidelity
Freedom Funds,
JPMorgan SmartRetirement and T. Rowe
Price's retirement funds, Pacholok says.
The glide path and long-term strategic asset allocation
primarily drive investors' asset exposures in the Freedom Funds,
says Sarah O'Toole, a Boston-based institutional portfolio manager
at Fidelity Investments. But the funds' managers may also make
active allocation decisions based on the intermediate-term outlook
for the next five years. " We're looking for assets that are mispriced,
and we'll invest in areas that provide an opportunity for our investors, "
she explains. The funds' managers did that a few years ago
by making a commodities investment, for example.
http://www.PLANSPONSOR.COM
PLANSPONSOR - October-November 2022

Table of Contents for the Digital Edition of PLANSPONSOR - October-November 2022
