- The level of active management has important implications for performance and expenses. Holding actively managed products in the target date suite provides the potential for outperforming the market but usually leads to higher expenses for participants, while using passive products (e.g. index-replication strategies) does not. A better approach is to select managers who pair high-conviction active strategies that have the potential to deliver meaningful outperformance with passive strategies to reduce the overall cost to participants.
- Plan sponsors should also look for retirement solutions that offer independent investment processes. In some target date solutions, all investment research is produced by the manager’s centralized research department, the underlying investment teams rely on the centralized research to make decisions, and all personnel are employees of the manager. While this can lead to operational efficiencies, it also exposes participants to more concentrated manager risk. A better approach is to partner with a manager who can identify investment teams with expertise in different asset classes, allowing each team to invest a sleeve of the portfolio in their area of market expertise. These investment teams should be operationally and culturally independent.
- Don’t be afraid of products with higher equity allocations. Target date products attempt to manage two competing risks: the risk of the investment losing value (principal risk), and the risk of participants outliving their assets (longevity risk). High equity allocations make sense early in the glidepath, since equity has higher expected returns over long periods than fixed income. But equity also has an important role later in the glidepath – to allow for portfolio growth in the event that the participant lives longer than anticipated, as participants will draw on these assets for an unknown number of years. While it is important to reduce risk as participants age, going too far to protect against market declines trades one risk for another.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.