How to evaluate target date funds

In addition to fees and results, an evaluation of a TDF should consider a target date provider’s investment approach and its potential to balance participants’ need to build and preserve wealth.

When evaluating a target date series, it’s important to look at the asset allocation (the glide path) over time, considering how it addresses the needs of younger and older participants. Ultimately, a target date fund must balance participants’ goals of building and preserving wealth. Early on in a participant’s career, capital appreciation is most important. With many working years ahead, the participant should have sufficient time to recover from any market downturns.

As participants approach retirement, they still need to build wealth. Given lengthening life spans, retirees at age 65 may need to build enough savings to last for what could be a 30-year-long retirement. However, risk becomes more important at this stage. With fewer working years left, participants don’t have as much time to recover from market downturns. During retirement, capital preservation becomes more important.

A fund’s asset allocation is key to balancing the need for growth with the need for downside resilience. However, the amount of equity exposure is only one factor in managing risk. That’s because not all equity is created equal when it comes to volatility. Some equities, like dividend-paying stocks, may hold up better than growth-oriented stocks when markets decline. Security selection can have a great impact on both risk and return potential — making it critical to look carefully at a target date provider’s investment approach.