Key Highlights
- A target retirement year only tells part of the story. Funds with the same target date can differ significantly in asset allocation, risk exposure, and investment philosophy.
- Glidepath design influences how risk is managed around retirement. Different approaches can place varying levels of emphasis on managing risk around retirement and maintaining growth potential later in life.
- Investment philosophy extends beyond asset allocation. Active versus passive management, tactical flexibility, and underlying fund selection can affect a target date suite's risk profile and costs.
- Participant needs should inform strategy selection. Demographics, anticipated withdrawals, and the expected use of plan assets after retirement help determine which approaches may be appropriate.
- The target date fund market is evolving. Growing interest in retirement income features, customization, and different investment vehicles is expanding the considerations involved in evaluating suites.
A closer look at the strategies behind target date funds
Target date funds have become one of the most widely used investment options1 in defined contribution retirement plans, offering participants a simplified way to invest for retirement.
However, funds with the same target retirement year can differ significantly in how they're constructed and managed. A target year may indicate an investment's intended timeline, but it doesn't reveal much about the strategy behind it.
Those differences often stem from decisions made at the broader target date suite level. Each suite reflects an investment philosophy that guides its asset allocation, risk management, and portfolio construction.
As the market expands, new approaches to retirement income, customization, and underlying investments are giving advisors more to consider when assessing which strategies best serve plan participants.
Same retirement year, different investment risks
At the center of every target date fund is a glidepath2, which determines how the portfolio's asset allocation changes as participants approach retirement.
Managers have considerable discretion over the timing and extent of changes in asset allocation. Some strategies reduce equity exposure more aggressively before retirement, while others maintain higher equity allocations at the target date and continue shifting toward more conservative investments in the years that follow.
These approaches are commonly described as "to" and "through" retirement glidepaths.
- "To" retirement glidepaths typically reach their most conservative allocation at or near the target retirement date, placing greater emphasis on limiting volatility as participants approach retirement.
- "Through" retirement glidepaths continue reducing equity exposure after the target date, maintaining greater growth potential later in retirement.
The choice between these approaches depends on participant demographics and how retirement plan assets are expected to be used after retirement.
Investment philosophy matters beyond the glidepath
Glidepath design is only one way target date suites differ. Investment managers also make decisions about underlying assets, management styles, and the flexibility built into their strategies.
Underlying investments vary, too. Some suites rely primarily on lower-cost index funds, while others use actively managed strategies that seek additional returns or risk-management benefits, typically at a higher expense. Managers can also combine both styles.
Even suites composed entirely of index funds require managers to make decisions about equity exposure, asset allocation, and glidepath design. Advisors must therefore consider both underlying expenses and the philosophy guiding the overall strategy.
Other differences include the use of assets such as real estate, commodities, private equity, or private credit, which can offer diversification or return opportunities alongside additional risks.
These choices contribute to differences in portfolio construction, risk exposure, and costs across target date suites.
Evaluating strategies in the context of participant needs
The investment decisions behind a target date suite must also be considered in relation to the participants a retirement plan serves.
Demographics and the expected use of retirement savings are particularly relevant to glidepath design. A strategy that reaches its most conservative allocation at retirement may place greater emphasis on limiting volatility as participants approach withdrawals. One that continues reducing equity exposure after retirement may place greater emphasis on maintaining growth potential over a longer period.
The anticipated use of plan assets matters as well. Participants who expect to retain their assets in the plan after retirement may have different investment needs from those who plan to begin withdrawals or move their savings into other retirement accounts.
The Department of Labor's guidance for plan fiduciaries3 also identifies participant ages, salary levels, contribution rates, turnover, and withdrawal patterns as relevant considerations.
Even participants with similar anticipated retirement dates can have different financial circumstances, contributing to interest in personalized workplace retirement investments.
These characteristics provide important context for assessing whether a manager's investment approach fits the plan's participants.
Explore what differentiates target date suites
For advisors, the target retirement year is only a starting point. Glidepath design, investment philosophy, costs, emerging product features, and participant characteristics all contribute to whether a suite is appropriate for a retirement plan.
For a deeper look at how glidepath design, investment philosophy, underlying fund selection, and other considerations can differentiate target date suites, download What Advisors Should Know About Target Date Suites.
