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The Future of Target Date Funds

What is the Future of Target Date Funds?

Target date funds (TDFs) are the most popular investments in defined contribution (DC) plans attracting more than half of all new contributions partly because they are also the most popular default option or QDIA. But TDFs are evolving and will continue to change and adapt to shifting markets adjusting to investor behaviors and demographics. So how do we expect TDFs to change in the near and distant future?

Learn more about Fidelity’s Target Date Strategies

According a Brian Leite, Head of Institutional Portfolio Management at Fidelity Investments, changes expected for TDFs include:

  1. More Customization – Moving away from investor averages to a more personalized portfolio according the needs of an individual investor.
  2. Investing Principles – Rather than straight portfolio theory assuming that people act logically, TDFs will be designed based on how people actually behave.
  3. Sophisticated Investments – Underlying investments will more beyond just traditional stocks and bonds into more sophisticated instruments that most investors should not use on their own.

In general, TDF will be more focused on outcomes than achieving short-term results because DC plans are becoming more like defined benefit (DB) or pension plans focused on the liabilities of the investor and how to cover them in the future.

TDF providers like Fidelity Investments that have access to large databases of investor behavior will continually adjust considering such things as:

  • When do people tend to start investing?
  • How much do they save?
  • How are company matches changing?
  • How are lifespans shifting?
  • What are the withdrawal needs of investors?

TDFs also need to adapt to evolving markets such as the current low interest rates and slowing global growth. Fidelity Investments, known for active investing and the use of proprietary funds in their TDFs, is also adjusting offering index funds within their target date services as well as outside investment managers. In addition, they are looking at using managed accounts to complement their TDFs.

Plan sponsors need to make sure that their TDF provider is constantly evolving not just to the changing investment environment but also adapting the participant behaviors and demographics which can be as challenging to predict as the market.

Fred Barstein

Fred Barstein

Founder & Editor-in-Chief at 401kTV | TRAU | TPSU
Fred Barstein is the Founder & Editor-in-Chief of 401kTV. Fred is also the Founder and CEO of The Retirement Advisor University (TRAU), a collaboration with UCLA Anderson School of Management Executive Education and The Plan Sponsor University (TPSU).Mr. Barstein was also Founder and Editor-in-Chief of NAPA Net.
Fred Barstein
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