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Target Date Evaluation Insights

January 2017

Target Date Evaluation Insights

PLANADVISER spoke with American Funds Senior Vice President for Defined Contribution John Doyle about the evaluation process for target date fund series. The discussion covered the importance of fees, the different types of glide paths, how risk and return factors into participant outcomes and what evaluation tools are available to help advisors and sponsors decide on the right target date series.

Video

Featuring

John Doyle

Transcript

Alison Cooke Mintzer: This is Alison Cooke Mintzer, Editor-In-Chief of PLANADVISER. I'm speaking today with John Doyle, Senior Vice President, Defined Contribution at American Funds. Hi, John.

John Doyle: Hey, how are you?

Alison Cooke Mintzer: I'm well, thanks. Let's talk about target date funds. Given the recent focus on fees and lawsuits, is an advisor correct in thinking that his role is to help his plan sponsor clients select low-cost, passive investments? Is that the safer option?

John Doyle: Fees are important and I hear that a lot from a lot of advisors as they're talking to their clients that maybe this is the safest or the easiest way for them to go. But fees shouldn't be the only thing that they look at. When you think about the job of a plan sponsor and the job of the advisor as they're working with their client it's to address the needs of the participants within the plan. But I think you need to look at risk, I think you need to look at what your objectives are for the plan and how that QDIA will address the needed outcomes for the participants. Fees are kind of predictable and tangible so it makes it the easy factor for a lot of people to gravitate to, but it's not the only thing that matters. That's why you hear about it in a lot of the cases that keep coming up that it's all about fees. It's not all about fees. It's about what's the best solution that you can provide so that a participant can retire when they want to retire and retire with dignity.

Alison Cooke Mintzer: American Funds has seen a lot of growth and a lot of inflows into their target date funds. What do you think is driving that?

John Doyle: Now I think there are a number of things. I mean we're very proud of the fact that we've grown over the last few years to now the fourth largest target date mutual fund series, and I think there are a couple of things driving that. First is what I would consider to be a relatively unique glide path that plan sponsors are really starting to understand. Rather than take a traditional view of looking at major asset class, look at the equity allocation, look at the fixed income allocation and use that as a gauge for risk and a gauge to address the objectives of the participant at various points in their timeline, we try to kind of have a more dynamic or what we call a glide path within a glide path where we actually are changing the makeup of the equity allocation and the makeup of the fixed income allocation to address the needs as an individual goes along their timeline through the accumulation years as they transition into retirement and then actually into their retirement years.

And I think it's because a lot of plan sponsors are starting to understand that if they really want to have a positive impact on the participants and their plan on their employees that the investments that they offer and the QDIA that they offer is probably the most important decision, and so we're starting to see that being the decision that's made first, separated from the recordkeeper decision, and that's I think helped drive a lot of assets into American Funds target date.

Alison Cooke Mintzer: How should advisors be evaluating target-date funds? Are there tools or other services to help them analyze what the differences between the funds are and which might work best for their plans?

John Doyle: There are tools out there that I think that allow a plan sponsor and the advisor to kind of compare and contrast, but I think the challenge with a lot of the tools has been that they take an advisor through a questionnaire and they ask certain questions about where they think the plan wants to be, what they think the risk tolerance is of the plan, and they'd lead them into a recommendation, so the tool is basically you're filling out a questionnaire and you have a recommendation at the end of the questionnaire. The challenge is that the recommendation is based on the interpretation of the results by whoever the developer is of the tool, so one of the things that we did at American Funds was we tried to develop a tool that really is focused on allowing you to compare and contrast and allowing you to help your client make the decision on where the direction they should go in. It uses all Morningstar data, it allows you at any one time to compare and contrast any four target date funds, it doesn't have to be American Funds, it can be any four target date and it also includes all the different share classes. So you can make decisions, as long as it's in the mutual fund universe, then you can use that as a tool that will help you compare and contrast and give you what you need to take to your client so that with your client you can make decisions, identify what the objectives are for that client and be able to drive to a decision on what the best QDIA is for your needs and for your plan.

Alison Cooke Mintzer: Thanks, John.

John Doyle: Thanks, Alison. It's been great. Appreciate the time.

Alison Cooke Mintzer: This is Alison Cooke Mintzer. You've been watching my conversation with John Doyle of American Funds.


Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

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. 

Each target date fund is composed of a mix of the American Funds and is subject to the risks and returns of the underlying funds. Underlying funds may be added or removed during the year. Although the target date funds are managed for investors on a projected retirement date time frame, the funds' allocation strategy does not guarantee that investors' retirement goals will be met. The target date is the year in which an investor is assumed to retire and begin taking withdrawals. American Funds investment professionals manage the target date fund's portfolio, moving it from a more growth-oriented strategy to a more income-oriented focus as the fund gets closer to its target date. Investment professionals continue to manage each fund for 30 years after it reaches its target date. 

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.