Evaluating the Hybrid Target Date Landscape
There is growing awareness that there are pitfalls to solely using passive funds to implement a TDF glidepath and that some active exposure can improve retirement outcomes, leading hybrid TDFs to capture a growing share of TDF assets. The active-per-basis point expense metric can help plan fiduciaries meaningfully compare hybrid TDFs and determine the reasonableness of expenses in the context of the value being provided.
From Active To Passive
Ten years ago active series dominated target date fund assets (TDF) and flows, but the pendulum has swung definitively into passive territory. Today a confluence of trends, including the industry’s intense focus on fees, has propelled assets and flows into TDFs that implement their glidepaths with only passively managed underlying funds.
Passive TDFs Are Not The Magic Bullet
For participants, a purely passive approach to TDF implementation comes with a significant set of opportunity costs including the potential for alpha and enhanced risk mitigation.
For retirement plan fiduciaries, evaluating TDFs with too exclusive a focus on expenses can actually leave them short, if not in breach, of their responsibilities to plan participants.
Why Hybrid Is Gaining Traction
Hybrid TDFs are now gaining traction in the marketplace. By combining passive and active exposure, hybrid TDFs can drastically improve the retirement outcomes for plan participants. Passive exposure helps keep participant expenses low, while active exposure provides the potential for added incremental returns and the mitigation of key investment risks.
An Overview of The Hybrid TDF Landscape
All hybrid TDFs are not created equal. Understanding the different approaches each series takes in mixing active and passive exposures is an important fiduciary concern, especially when looking at it in terms of (1) which asset classes are indexed vs. actively managed; (2) the series overall active and passive exposures; and (3) fund expenses.
Evaluating Hybrid TDFs: Active-Per-Basis Point Expense
A meaningful evaluation of a hybrid TDF’s expenses requires fiduciaries to consider how much active exposure investors receive for each unit of expense they are paying. Using the active-per-basis-point expense (“Act/BP”) metric can help plan fiduciaries meaningfully compare the expenses of a hybrid TDF to others in its hybrid peer group.
The target date is the approximate date when investors plan to retire and may begin withdrawing their money. The asset allocation of the target date funds will become more conservative as the target date approaches and for 10 years after the target date by lessening the equity exposure and increasing the exposure in fixed income investments. The principal value of an investment in a target date fund is not guaranteed at any time, including the target date. There is no guarantee that the fund will provide adequate retirement income.
A target date fund should not be selected solely based on age or retirement date. Before investing, participants should carefully consider the fund’s investment objectives, risks, charges, and expenses, as well as their age, anticipated retirement date, risk tolerance, other investments owned, and planned withdrawals.
The stated asset allocation may be subject to change. It is possible to lose money in a target date fund, including losses near and following retirement. Investments in the Funds are not deposits or obligations of any bank and are not insured or guaranteed by any governmental agency or instrumentality.
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