For plan participants, target-date funds simplify the complex task of investing for retirement by automatically allocating assets based on each individual's age and retirement date. This simplicity helps to explain why target-date funds have become one of the most popular investment options within defined contribution plans.
However, beneath the simplicity of target-date funds lie divergent investment methodologies. In particular, glidepath design should garner significant attention given that it is the primary determinant of risk and return in target-date funds throughout a lifecycle.
Given that each target-date manager uses a proprietary glidepath methodology, this has led to wide dispersion of equity allocations across the industry. For example, last year, the range of total equity allocations between the most aggressive and conservative glidepaths was more than 35 percentage points for participants aiming to retire in 2020. These significant differences in equity allocations can create wide dispersions in accumulated wealth, especially near retirement.
When evaluating a target-date fund's glidepath design, there are three key questions a plan sponsor should ask:
- How are assets managed during the accumulation phase?
- How are assets managed near and in retirement?
- How is retirement success defined and measured?