Actively managed and passively managed target-date funds produce similar investment returns over longer time frames, new research shows.
This research comes as target-date funds play an increasing role in defined contribution retirement plans and as plan executives debate which is the most appropriate approach. But investment consultants to DC plans say the research likely won't greatly affect that debate.
For the three years ended Dec. 31, the annualized total return, net of fees, was 11.7% for passive funds and 11.6% for active, according to investment research firm Morning-star Inc., Chicago.
For the five years end-ed Dec. 31, the annualized return, net of fees was identical, at 9.1%. Returns of target-date funds that blend active and passive management were similar to the other funds — 11.6% annualized over three years and 9.3% for five years.
(Morningstar classifies an active fund as having 80% or more of assets actively managed and a passive one, 80% or more of assets passively managed. Many are 100% one way or the other. Blend funds have allocations that fall in between the extremes.)
Passively managed target-date funds appeal to DC plan executives for several reasons, consultants said, including a desire for lower-cost options, a belief that there's less manager risk and fiduciary risk, and a plan-management philosophy that favors passive over active. The Labor Department's regulations increasing fee-disclosure requirements between providers and sponsors, which took effect in mid-2012, played a role in making executives more sensitive to costs and more willing to choose a passively managed approach, consultants say.