When it comes to target date funds, cost matters. But since participants could be invested in these funds for decades, every potential advantage should be considered. For a fully active solution, there are three potential sources of excess return to consider, as actively managed target date funds seek to deliver value in three ways.
The first is through the choice of a strategic glide path, the long-term targeted allocations to various asset classes (primarily equity versus fixed income). The second is through tactical allocations, purposeful shifts from those asset allocations in response to market conditions. The third way — a critical differentiator — is through security selection, the potential to generate excess returns via active management decisions.
But passive target date solutions1 — which constitute the majority of the nearly $3 trillion invested in the industry2 — may not have access to the potential benefits of active security selection. While fees are incredibly important, they should not be the sole determining factor in selecting a target date series. Recent litigation has highlighted the importance of relative returns and overall participant outcomes as well as absolute returns. Simply focusing on fees and costs is no longer enough to avoid litigation risk. And, more importantly, it may not provide the best outcome for participants.