Consistency and Repeatability in Target Date Fund Evaluation | Capital Group

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Defined Contribution Insights

March 2015

Consistency and Repeatability in Target Date Fund Evaluation

“If a TDF’s investment strategy or management team changes significantly … then it may be necessary to consider replacing the fund.”

— U.S. Department of Labor

Meeting DOL Guidelines, Article 5 of 5

Satisfy DOL guidelines with a participant-focused approach to evaluating target date funds.

Authors:

Wesley Phoa, portfolio manager, target date and fixed-income funds, 21 years of experience.

Jason Bortz, ERISA attorney, 17 years of experience.

Toni Brown, CFA senior defined contribution specialist, 25 years of experience.

John Doyle, senior defined contribution specialist, 28 years of experience.

Rich Lang, investment specialist, 21 years of experience.

Years of experience as of December 31, 2014.

Target date funds have enormous potential to make defined contribution plans more effective and straightforward for participants. But to capture the funds’ benefits — and to help meet fiduciary obligations — plan sponsors must implement thorough, well-documented evaluation procedures.

The U.S. Department of Labor has made it clear that plan sponsors must carefully evaluate target date series before adding them to a plan’s investment lineup, periodically re-evaluate any target date funds currently offered by the plan and document the process.1 Yet evaluating and understanding target date funds can present challenges to plan sponsors. Although the funds are designed to make retirement investing simple and convenient for plan participants, their underlying construction can be complex and can vary widely among the dozens of series on the market.

We believe that plan sponsors’ evaluation process should encompass the following five considerations:

  1. Participant Needs

  2. Glide Path Construction

  3. Cost Versus Value

  4. Quality of Underlying Funds

  5. Consistency and Repeatability

In this series of five articles, we walk plan sponsors, consultants and retirement plan advisors through each of the five components of the evaluation process. Thorough, effective target date fund evaluation will help plan sponsors fulfill not only the letter of the fiduciary rules, but also their intent: to give participants the best opportunity to meet their retirement saving and investing needs.



Consideration 5: Consistency and Repeatability

Finally, plan sponsors need to gain confidence that a target date series’ results are likely to be consistent and repeatable. To that end, they can consider the following criteria:

Stability of the fund and its glide path construction. Providers occasionally adjust their glide paths to reflect new research or other considerations. That said, large or frequent changes to a fund series or its glide path may be reason to doubt the fund’s likely consistency in the future.

Consistency of series results. Review the series’ risk-adjusted results over rolling periods. Pay particular attention to the steadiness of results, and the percentage of periods in which the funds outpaced their indices and peers.

Down-market protection. Review results during severe market declines to see how effectively the fund series limited the impact on participants.

Experience, tenure and retention rate of oversight managers. The more experienced and stable a target date fund’s oversight team is, the more consistent the series’ results are likely to be.

Investment management structure. Providers should have systems to ensure continuity of management at each fund. A team-based structure is likely to result in greater consistency and repeatability than a star system. If a series’ underlying funds are run by solo managers, plan sponsors need to make sure they are comfortable with the firm’s plans for succession in the event the manager leaves.

Organizational stability. Stable firm ownership and leadership allow for continuity of philosophy and investment strategies.

Ideas for Action

  • Check the stability of the fund’s approach, including its glide path
  • Review series results, considering consistency and down-market protection
  • Evaluate series management personnel and structure

When evaluating target date funds to comply with DOL guidelines, keep in mind these five considerations:

  1. Participant Needs

  2. Glide Path Construction

  3. Cost Versus Value

  4. Quality of Underlying Funds

  5. Consistency and Repeatability


Contact your American Funds sales professional for more information on target date fund evaluation.

This information is intended to highlight issues and not to be comprehensive or to provide advice.

1 U.S. Dept. of Labor, “Target Date Retirement Funds — Tips for ERISA Plan Fiduciaries,” February 2013.

 


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Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the collective investment trust's Characteristics statement, which can be obtained from a financial professional, Capital or your relationship manager, and should be read carefully before investing. 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice. Investors should consult their tax or legal advisors. 

The Capital Group companies manage equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.