As part of a video series to help plan sponsors better understand target date funds (TDFs) which have grown to about $800 billion mostly from defined contribution (DC) plans and growing rapidly attracting 60-70% of new contributions thanks in part of their role as the default option or QDIA, we stopped by Fidelity Investment’s offices in Boston to discuss the difference between “To v. Through” TDF strategies and their impact on retirement outcomes.
The debate between “To v. Through” TDFs was acute after the 2008-09 market disruption where some investors in 2010 TDF experienced heavy losses even though they were close to retirement. Because “Through” TDFs focused are focused on longevity risk, they continue to have a higher equity exposure taking more risk seeking higher returns assuming that people stay invested through retirement. On the other hand, “To” TDFs focused on market risk have their lowest equity exposure and lowest risk at retirement age or the date of the fund suite.
Fidelity Investment’s Brian Lieite, Head of Portfolio Investment Management, discusses how the two strategies fare in different market scenarios. As expected, in the 10% worst markets, “To” TDF will do better but in average markets, “Through” TDFs perform better and, combined with a deferral rate starting at 6% increasing to 18% averaging 15% over an investor’s lifetime, these TDF funds achieve a 98% income replacement rate or an additional $10,000 annually.
So while plan sponsors cannot control or impact the markets which will fluctuate, they can have a positive impact on savings rates through auto-escalation and the stretch match which will always have a positive impact on retirement outcomes no matter which TDF strategy is chosen. Of all investments, plan sponsors need to understand TDFs most, how they work and the different strategies to make sure they pick the ones best suited for their employees based on their demographic profile and behaviors.
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