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Wednesday, January 29, 2014

The Target Date Performance Puzzle

News summary by MFWire's editors

How the heck do you evaluate target date funds? Morningstar fund of funds research team strategist Josh Charlson wonders.

In a "Fund Spy" column last week, Charlson highlights a conundrum that has been vexing 401(k) industry insiders: the big discrepancies in target date fund performance in 2013 arose because of the different equity allocations within different TDF families. Those at the head of the pack tended to have higher allocations to equities, while more conservatively allocated TDF families fell behind.

So what's an advisor, or 401(k) plan sponsor, to do? Charlson points to the impact of 2008 performance as a useful contrast for some TDF families (as aggressive ones tended to suffer through the crisis). Yet the truth remains that comparing TDFs is a tricky business, with different families having not only different strategies (i.e. glidepaths and underlying investments) but different goals (to vs. through, downside protection, inflation protection in retirement, etc.) as well. Morningstar and several others offer TDF indexes, and several TDF providers offer their own tools (tinted with their own TDFs' goals, of course) for comparing, yet the TDF selection process remains tricky and divisive. 

Edited by: Neil Anderson, Managing Editor


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