Criteria used to evaluate retirement funds, especially Target Date Funds (TDF), should be different than for other types of investing. But, according to a survey conducted late 2015 by MFS, defined contribution (DC) plan sponsors and even advisors take a much too short term view focused on the wrong issues.
According to the study:
- 74% of plan sponsors put funds under review based on one-three-year history
- For TDFs, when asked to rate the “one of the most important” criteria:
- Performance was cited by 64% of plan sponsors and 66% of advisors
- Fees were cited by 46% of respondents
- Risk management was cited the least by both advisors and plan sponsors
- Asset allocation was only noted by 40% of plan sponsors and 50% of advisors
Industry experts tend to agree that asset allocation and risk management are much more critical factors when evaluating TDFs which need to be evaluated over various market cycles. For example, during the latest market crash in 2008-09, the 2010 TDFs that invested “to retirement”, meaning they were most conservative at the date of the fund, lost only 19.76% while the same version of “through retirement” funds which continue to take risk at the projected retirement date lost 27.16%.
Ryan Mullen, Head of MFS’s Retirement Division notes:
By focusing so intensely on performance and fees, plan sponsors may be overlooking the importance of asset allocation and risk management, particularly through difficult markets like we’ve seen of late. These factors can have an outsized impact on the performance of a target date fund…As fiduciaries looking out for the best interests of plan participants, sponsors and advisors would do well to look beyond easily quantifiable fund features, to investment choices that are managed in line with a retirement investor’s longer horizon.
Well said.
