As ERISA Fiduciaries charged with the selection and oversight of your Plan’s investment menu, there is likely no more impactful investment decision you’ll make on behalf of plan participants than the selection of your plan’s qualified default investment alternative (QDIA). The dynamic asset allocation structure of target retirement funds has made them the overwhelming QDIA of choice across qualified plans, offered in 96% of plans1 and amassing $3.5T in total assets2 as of the end of 2023.
Fiduciaries should approach both the selection and ongoing monitoring of the Plan’s target retirement suite with rigorous due diligence, considering participant demographics, equity glidepath suitability, talent and tenure of management teams, tactical asset allocation flexibility, component fund investment structure, investment management fees, and net-of-fees performance.
While each of these elements is critical to long-term success, cost has clearly been front-and-center for plan sponsors in decision making. Vanguard Target Retirement remains the world’s largest target retirement suite, with nearly $1.3T in assets and more than 37% market share in the category.2 This trend toward passive management has intensified in recent years, as unrelenting ligation around retirement plan fees helped passive strategies from Vanguard, BlackRock, Fidelity, and State Street, each with an expense ratio less than 0.10% (Exhibit 1), fill four of the top five spots for 2023 target retirement inflows, according to Morningstar.2
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Minimizing cost in the plan’s QDIA is an important consideration, but is it the most important consideration? ERISA doesn’t require sponsors to select the lowest-cost alternatives, rather the prudent person rule supports fiduciaries evaluating both active and passive management in determining what is best for plan participants. When viewed through the lens of net-of-fees performance, passively managed target date solutions simply haven’t represented the best value proposition. Managing a mixed asset portfolio with a global footprint provides portfolio managers with immense flexibility – flexibility around high-level asset allocation, underlying style tilts, and portfolio shifts in periods of volatility. Over the past decade, talented active managers have shown the ability to parlay this flexibility into net-of-fees returns that exceed both market benchmarks and the industry’s biggest passive providers (Exhibit 2).
Though active target date suites have shown the ability to add value, we understand the hesitation plan sponsors may have in moving from an ultra-low fee environment to the 0.38% average of the largest all-active providers (Exhibit 1). That said, some of the industry’s biggest asset managers have introduced a third option – “blend” strategies that combine some of the flexibility found in all active suites, with some of the low-cost efficiency generated by introducing passively managed component funds.
These target retirement “blend” strategies have only a limited track record, but initial results are compelling. Net-of-fees resultsover the past 3 years are competitive with active suites and outpace passive strategies across the board. On average, the industry’s biggest blend strategies carry expense ratios of just 0.22% (Exhibit 1), presenting an opportunity for plans using a passive strategy to consider a more dynamic option and plans using an active strategy to reduce investment management fees without sacrificing much in long-term expected return.
Sources:
1 Vanguard, How America Saves 2024
2 Morningstar, 2024 Target-Date Strategy Landscape
*Returns for “Active Target Date” represent a quarterly rebalanced blend of: Fidelity Freedom K6, T. Rowe Price Retirement I, American Funds Target Date R6, and JPMorgan SmartRetirement R6.
**Returns for “Blend Target Date” represent a quarterly rebalanced blend of: Fidelity Freedom Blend K6, T. Rowe Price Retirement Blend I, and JPMorgan SmartRetirement Blend R6.
***Returns for “Passive Target Date” represent a quarterly rebalanced blend of: Vanguard Target Retirement, Fidelity Freedom Index Instl Premium, BlackRock LifePath Index K, and State Street
Target Retirement K.
Source: Morningstar Direct. The above performance was obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. Past performance is no guarantee
of future results.
