Fred’s Take: The best way to win an RFP or any sort of evaluation process is to set the criteria emphasizing what you’re good at. That seems to be the theme of the day with TDFs (target date funds) where the manufacturers create the evaluation tool. Most tools focus on performance, Morningstar ratings and fees which seems logical. But TDFs are a basket of investments designed to be held for very long periods of time depending on your age. Dorann Cafaro, 401kTV’s resident expert on TDFs, suggest that DC (defined contribution) plan sponsors start with the objectives that meet the unique needs of their employees and company and then compare which funds are most suitable. What a novel idea – start with what you want.
If you are involved in the selection of your 401(k) Plan’s investments you may be familiar with the pages and pages of data that seem to accompany any review or selection evaluation. Even if you just reviewed an investment factsheet, you realize it can contain an overwhelming amount of data to be evaluated. Consider this simple sample “A” below:
A: Fund Objective
This target date investment seeks the highest total return over time consistent with an emphasis on both capital growth and income.
| Time | Performance: | +/- Benchmk | Rank in Cat | # funds in Cat |
| 1 yr | -2.34 | 2.78 | 14 | 242 |
| 3 yr | 8.54 | 4.14 | 4 | 201 |
| 5 yr | 9.26 | 2.89 | 3 | 169 |
| 10 yr | 6.17 | 0.87 | 1 | 77 |
| Sectors | % | Data | % | Fees | % |
| Technology | 13.91 | Tenure | 12 | Expense Ratio | 0.72 |
| Healthcare | 15.51 | Assets | $23.1 B | % cash | 3.69 |
| Consumer Cycl | 13.99 | Credit quality | mod | % US stock | 48.36 |
| Industrials | 11.80 | Int rate sensitvy | low | % non-US stock | 27.25 |
| 3 yr beta | 0.97 | Stand Deviation | 8.23 | % bonds | 19.48 |
| 3 yr alpha | 1.23 | Sharpe Ratio | 1.03 | M* Rating | 5 stars |
With so much data it is easy to just look at the most obvious points (highlighted):
- Current performance
- Rating notation (number of stars)
- Style category
- Fees
This cherry-picked data may not be sufficient to evaluate the investment. For example current performance is not very useful when evaluating an investment that will be held in a 401(k) for long-term growth. But even if you perform an in depth review of the data how useful was it to your decision?
A few questions to consider:
- Did all this data tell you how suitable this investment was to your plan, your participants?
- Did all this data help you understand what investment criteria was more important to the plan or what investment criteria did not meet your plan’s needs?
- How useful was the generic rating, a rating applied under all circumstances for everyone?
- Would data designed to document the selection or monitoring of your personal plan’s investment process be more useful?
Consider how you would answer these questions if you had received sample “B” investment data below:
B: Fund Objective
This target date investment seeks to be the most suitable option meeting what criteria is important to this plan weighted as follows:
The importance weighting of your plan’s demographics is as follows:
| TDF Vintage Year | 2015 | 2020 | 2025 | 2030 | 2035 | 2040 | 2045 | 2050 | 2055 | 2060 |
| Demographics | 12% | 8% | 15% | 8% | 20% | 21% | 10% | 9% | 2 % | 0% |
| Suitability Rating vs All TDFs * | 100 | 100 | 100 | 100 | 99 | 100 | 93 | 94 | 100 | na |
* 100 = most suitable 0 = least suitable
The TDF Suitability Rank is #1 out of 122 target date funds evaluated for comprehensive 107 unique data measurements.
Criteria with High Suitability Higher absolute return, higher relative return, more stable returns, lower downside correlation, less risky asset allocations, more stable, risk exposures, greater equity diversification, lower expenses, longer manager tenure and higher AUM.
Criteria with lower suitability Higher credit quality, and great inflation protection
If you found making your plan’s target date data personal also made it more useful consider running a QDIA Blue Book report.
Written By Dorann Cafaro
