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Target Date Fund Facts
2013
September 28, 2013 The
Target Date Fund Facts
(TDF Facts
) is an annual compilation of of key information about these funds that are necessary to understand and evaluate these investment vehicles.TDF Facts
is intended for use by advisors and fiduciaries to carry out their duty to prudently select and monitor investments.TDF Facts
provides a context for establishing reasonable expectations in the most important areas of evaluation of performance. Selection and monitoring of Target Date Funds require complexities that extend beyond the traditional investment evaluation. These measures are presented in theTDF Facts
: Performance in market conditions that reflect the ability to preserve capital as well as the ability to participate in appreciating markets.
Reliability of performance in varying market conditions for each target year.
Expenses for each target year in relation to the service level provided.
TDF Facts
is best used in conjunction with theTDF Rating Methodology
.Contents
Performance in Up and Down Years ... 2
Best and Worst Results ... 2
Top Ten Target Date Fund Families ... 3
Target Date Fund Reliability ... 4
Most and Least Reliable Funds ... 4
Top Ten Most Reliable Fund Families ... 5
Target Date Fund Fees & Expenses ... 6
Advisor Service Expectations ... 6
Lowest and Highest Fees & Expenses ... 8
Target Year Benchmarks ... 9
Target Date Fund Facts
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Performance in Up and Down Years
There are two primary goals of all Target Date Funds:
1. Preserve capital during periods of decline
2. Participate in the appreciation during periods of rising markets
The first
TDF Facts
measure is an assessment of how well Target Date funds have achieved these goals. This is done by presenting how well the best performing Target Date Fund compares to the worst in the most severe period of decline (2009), referred to as “Up Year” as well as the strongest period of rising markets (2008), referred to as “Down Year”. The information is provided separately for each Target Year as well as an average across all Target Years.The “Gap” represents the maximum advantage possible if the best performer is selected. All amounts shown are total return percentages after expenses.
Best and Worst Results
Target Years Avg 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 Up Year (2009) Best 23.4 26.7 31.5 33.6 35.5 36.3 38.0 39.0 39.1 39.1 38.9 39.0 35.0 Worst 16.5 22.0 11.5 15.4 13.8 20.0 6.1 23.1 26.6 25.1 27.0 30.4 19.8 Gap 6.9 4.7 20.0 18.1 21.8 16.3 31.9 16.0 12.5 14.0 12.0 8.6 15.2 Down Year (2008) Best -14.0 -22.2 -10.8 -16.4 -21.9 -24.9 -24.8 -30.5 -31.2 -33.5 -33.5 -38.9 -25.2 Worst -26.0 -29.8 -33.4 -36.1 -38.6 -40.6 -41.4 -41.9 -41.8 -42.0 -42.9 -41.2 -38.0 Gap 12.0 7.5 22.7 19.8 16.7 15.8 16.6 11.4 10.6 8.5 9.4 2.3 12.8
Target Date Fund Facts
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Top Ten Target Date Fund Families
Target date funds are of the used in “families” that represent as set of separate Target Years, all offered by a single investment provider. Components of each fund (sleeves) may be managed by one or more manager. Only fund families in existence for all time periods evaluated are included. Fund families that were not in existence for the first critical period (2008) or ceased to operate before the most recent full year (2012) are not considered to have a sufficient record to be included here.
The following table shows the best performing fund families, after weighing:
The relative performance (Rank) among 171 peers in the most critical periods: o Up Year (2009)
o Down Year (2008) o Turbulent Year (2011) o Recent Year (2012)
The reliability of performance measured on a scale of 0 to 100 and is based on the deviation in relative performance from year to year. Reliability reflects the statistical probability that the fund family will continue to have similar performance relative to its peers in the future.
Rank Target Date Family
Rank among 171 Fund Families
Based on Total Return (after expenses) Reliability (0 – 100) Up
Year Down Year Turbulent Year Recent Year Year Avg Critical
1 MFS Lifetime R4 50 23 26 46 14 79%
2 The Hartford Target Retirement R4 61 60 45 76 25 80% 3 American Funds Trgt Date Ret R5 52 84 24 18 22 66% 4 JPMorgan SmartRetirementr Instl 25 25 112 1 4 52% 5 MainStay Retirement I 102 43 67 40 53 68% 6 BlackRock LifePath Active K 85 76 63 44 68 76% 7 T. Rowe Price Retirement 3 114 84 4 1 46% 8 GuideStone Funds MyDestination GS4 81 83 21 70 64 67% 9 Invesco Balanced-Risk Retire R5 100 89 1 152 2 41% 10 MassMutual RetireSMART S 19 117 102 26 43 51%
Target Date Fund Facts
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Target Date Fund Reliability
In selecting an investment the past performance provides insights into capabilities but the history by itself is not a reliable predictor of the future for two principal reasons:
1. Past performance may have been achieved by accident and not skill, and
2. Future market conditions may differ from the past periods
The Target Date Fund Reliability provides a measure of statistical probability that limits the potential error of evaluations based on past performance.
The error due to accidental performance is reduced by measuring the deviation in performance over several critical periods. The likelihood of achieving consistent performance in the most significant Up Year, Down Year and Turbulent Year is highly improbable. The addition of the most recent full year further lowers the likelihood that the past results were due to an aberration or accident.
The error due to future market differences is reduced by evaluating performance in relation to peers and not the actual return produced by the fund. This relative performance or Rank is independent of whether the markets are rising, falling or highly volatile.
Most and Least Reliable Funds
Target Years
Avg 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055
Reliability of Relative Performance
Most 81% 75% 82% 84% 81% 80% 83% 79% 71% 73% 72% 90% 79% Least 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% Gap 61% 55% 62% 64% 61% 60% 63% 59% 51% 53% 52% 70% 59%
Target Date Fund Facts
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Top Ten Most Reliable Fund Families
Rank Target Date Family
Rank among 171 Fund Families
Based on Total Return (after expenses) Reliability (0 – 100) Up Year Down Year Turbulent Year Recent Year Critical Year Avg
1 BlackRock LifePath Active R 99 82 89 87 116 84% 2 DWS LifeCompass S 104 108 127 104 151 81% 3 The Hartford Target Retirement R4 61 60 45 76 25 80%
4 MFS Lifetime R4 50 23 26 46 14 79%
5 American Funds Trgt Date Ret R1 82 102 71 58 91 75%
6 Fidelity Freedom 84 68 95 127 96 71%
7 MainStay Retirement R3 121 62 86 70 102 70% 8 GuideStone Funds MyDestination GS4 81 83 21 70 64 67% 9 ING Solution Portfolio T 118 115 160 77 159 64% 10 Russell LifePoints Strategy R2 72 145 143 82 144 60%
Target Date Fund Facts
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Target Date Fund Fees & Expenses
Fees and expenses and front end loads compensate or reimburse investment managers, advisors and others who enable investors to access the investment funds. These funds are available without advisor services, with limited advisor services or a full array of services.
Advisor Service Expectations
Prudence and regulations require that plan fiduciaries assume certain responsibilities that protect employees and their retirement assets. In many cases, the tasks necessary to carry out these responsibilities can be delegated to an advisor who is compensated by fees and expenses paid by the plan. In these cases, the extent of advisor support should be in reasonable proportion to the fess and expenses.
Fees and expenses are put into four categories that reflect the level of advisor support that can reasonably be expected.
No Advisor Service: No advisor fees are charged.
Limited Advisor Service: Advisor fees are.25% or less.
Full Advisor Service: Advisor fees are more than .25%.
Front End Load Service: Applies when investments apply a sales charge for new investments. It should be noted that tasks that are not performed by the advisor remains the responsibility of the plan fiduciary. The plan fiduciary must perform these tasks or hire an expert to perform them.
Required Tasks
Reasonable Service Expectations from Advisors No Advisor Service Limited Advisor Service Full Advisor Service Front End Load Service
Define the plan’s investment-related goals and
objectives No No
NoPrepare and maintain the plan’s Investment Policy
Statement (“IPS”) No No
NoIndentify asset classes appropriate for plan’s portfolios No
Conduct due diligence for plan investment options No No No No Choose investments and create portfolios according tothe terms of the IPS No No No No
Develop and maintain model portfolios No No
No Construct QDIA investment alternatives No
NoTarget Date Fund Facts
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Required Tasks
Reasonable Service Expectations from Advisors No Advisor Service Limited Advisor Service Full Advisor Service Front End Load Service
Monitor investment options and prepare periodic
investment reports No No
NoPeriodically report investment decisions made to plan
sponsor and Named Fiduciary No No
NoConduct an initial fiduciary assessment No No No No Oversee plan administration activities No No
No Support for DOL and IRS audits No No
No Design rules for assigning participants to QDIAs No
No Place participants in appropriate investments No No
No Assist participants in selecting investments No No
NoProvide education to employees No
Control and account for the plan’s investment expenses No No No No Provide disclosure of estimated fees and services
Evaluate reasonableness of fees and expenses inrelation to the nature and quality of services rendered No No No No Periodically report fiduciary decisions made to plan
sponsor and Named Fiduciary No No No No
Select, hire and monitor other service providers No No No No Review plan’s success in meeting participants needs and
retirement goals and make recommendations for
Target Date Fund Facts
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Lowest and Highest Fees & Expenses
The fees and expenses for each level of services vary greatly as shown in the table below.
Target Years
Avg 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055
Net Expenses –No Advisor Service
Low 0.19 0.19 0.16 0.16 0.16 0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.17 High 0.56 1.03 1.03 1.11 1.05 1.19 1.09 1.28 1.12 1.30 1.11 1.69 1.13 Gap 0.37 0.84 0.87 0.95 0.89 1.02 0.92 1.11 0.95 1.13 0.94 1.52 0.96
Net Expenses –Limited Advisor Service
Low 0.81 0.78 0.32 0.32 0.32 0.32 0.32 0.32 0.32 0.32 0.32 0.32 0.40 High 0.81 0.87 1.34 1.34 1.34 1.35 1.35 1.36 1.37 1.37 1.39 1.38 1.27 Gap 0.09 1.02 1.02 1.02 1.03 1.03 1.04 1.05 1.05 1.07 1.06 0.87
Net Expenses –Full Advisor Service
Low 0.86 0.92 0.94 0.89 0.91 0.92 0.91 0.92 0.90 0.92 0.91 0.92 0.91 High 1.56 1.62 1.82 2.00 2.01 2.01 2.06 2.07 2.12 2.12 2.12 2.03 1.96 Gap 0.70 0.70 0.88 1.11 1.10 1.09 1.15 1.15 1.22 1.20 1.21 1.11 1.05
Front End Load Service
Low 4.25 3.50 3.50 3.50 3.00 3.50 3.00 3.50 3.00 3.50 3.50 3.50 3.44 High 4.25 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.63 Gap 2.25 2.25 2.25 2.75 2.25 2.75 2.25 2.75 2.25 2.25 2.25 2.19
Target Date Fund Facts
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Target Year Benchmarks
The results of target date funds are compared to two references:
All Funds for a Target Year: A comparison is made to all target date funds with the same target year that existed in the period(s) being evaluated (Qualified Funds).
Balanced Benchmark: Funds that identify themselves as moderately balanced in their name are used for these benchmarks. Such funds include those with a static allocation %, others with limits on allocations and those with great flexibility to change allocations. Regardless of the fund’s actual allocation, investors associate these funds with moderation.
Moderate funds are considered to be the best reference, since their goal puts equal emphasis on capital preservation and appreciation. The tests determine the allocator’s ability to preserve capital and capture appreciation in an up market (2009), a down market (2008), a turbulent market (2011), and a recent market (2012). Only funds that were in full operation during these periods qualify for the results ratings.
The blend of capital preservation and appreciation varies based on the proximity of the target date of each fund. Recent and past target dates are designed to have more conservative allocations and target dates that are far in the future have more aggressive allocations. As a result, recent and past target dates should produce better returns than the normal allocation in Down Markets but underperform in Up Markets. Conversely, allocations with distant target dates should outperform the normal allocation in Up Markets but underperform in Down Markets.
The following table illustrates this expected variation in performance, using moderately balanced allocation as the midpoint of the allocation range (norm). The target dates selected are for illustrative purposes only and are not intended to represent the universe of available target date investments.
Expected Performance
In Up Markets In Down Markets Allocation Range Midpoint of (Norm) Quartile Rank First Best 2045 2010 Second 2 2040 2015 3 2035 2020 4 2030 2025 Moderately Balanced Allocation Third 5 2025 2030 6 2020 2035 7 2015 2040
Target Date Fund Facts
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Recent Target Date Strategy Changes
Since the start of the critical test period (2008) various target date funds have made material changes to their investment strategies. The most significant changes are noted here to facilitate evaluation if one of these changed strategies are involved.
Date of
Change Family or Manager Target Date Fund, Description of Change
July 26,
2011 Vanguard Target Retirement Trust Collective investment trust version of existing target-date fund to better compete on price in the large and mega retirement plan markets. August 1,
2011 MassMutual RetireSMART Changes include the reduction of expense ratios for target-date fund series, the launch of a target-risk series in a mutual fund structure and the rebranding of both series, which will now be known as the RetireSmart mutual funds. December 7,
2011 Fidelity Investments Freedom Funds Shift the asset allocation of target-date funds to give its portfolio managers greater ability to gain more focused exposure to certain asset classes. As part of the change, the firm’s Freedom Funds will add three brand-new Fidelity Series funds to the underlying mix of funds. Those include the Real Estate Equity Fund, Floating Rate High Income Fund and Real Estate Income Fund. March 14,
2012 Invesco Balanced-Risk Retirement Funds
Use of non-traditional asset classes and complex strategies. Invesco uses exchange-traded futures and some swaps on futures to invest in commodities as well as derivatives to trade in six global equity markets and sovereign bond markets, including Australia, Japan and Germany.
March 14,
2012 PIMCO RealRetirement Pimco uses derivatives in its target-date funds to hedge against inflation, credit risks and currency dislocations by buying options contracts, futures or swaps. April 19,
2012 John Hancock Renamed target-date fund series in order to draw a clearer distinction between funds that are managed “to” and “through” retirement. The Retirement Living Portfolios will be called Retirement Living Through, and the Retirement Choices Portfolios will be the new Retirement Choices At series. June 14,
2012
J.P. Morgan Investment Management
Expanding target-date fund lineup with a new series that blends active and passive underlying investments as well as funds from unaffiliated managers. The new series, the JPMorgan SmartRetirement Blend Funds, uses a “to” approach and includes funds with maturity dates from 2015 to 2055 as well as an income fund. June 18, 2012 Columbia Management Retirement Plus
Liquidating Retirement Plus series, comprising eight funds.
June 26,
2012 AllianceBernstein’s Lifetime Income Strategy
A new retirement plan product that combines the simplicity of a target-date fund with the lifetime income guarantees available through a traditional defined benefit plan.
Target Date Fund Facts
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Date of
Change Family or Manager Target Date Fund, Description of Change
July 20,
2012 PNC Funds Utilize a highly flexible mix of underlying equities, fixed income and nontraditional assets, such as commodities and real estate. Such low-correlation investments can account for up to 30% of the portfolio at a given time, even after the target date.
August 1,
2012 American Independence Funds NestEgg funds
Liquidation of the NestEgg funds.
November 2,
2012 Franklin Templeton Gives asset allocation fund managers of the target-date and target-risk fund series the flexibility to double allocations to ETFs. Additionally, money market funds are being eliminated from the Conservative, Moderate and Growth Allocation funds.
November 2,
2012 MFS Lifetime funds Added five funds to itthes target-date suite. The new funds have maturity dates of 2015, 2025, 2035, 2045 and 2055. They bring the series to a total of 11, with dates from 2010 to 2055.
February 26,
2013 Invesco Balanced-Risk Retirement Funds
Added a new “aggressive” fund that employs more use of derivatives to its target-date fund glide path.
The new fund, which is available only as an underlying investment in the target-date suite, uses a 12% long-term risk target. By comparison, the existing fund uses an 8% long-term risk target. The new aggressive fund uses the same portfolio managers, strategies and investment objectives as the existing fund, though the new fund has a higher use of derivatives and a greater potential for volatility.
April 1, 2013 Franklin Templeton
Fund Allocator Series Portfolio managers will no longer be required to make tactical allocations to cash, though they retain the option of doing so at their discretion. May 3, 2013 American Century Replacing the Livestrong brand for its target-date funds with One Choice,
distancing itself from disgraced cyclist Lance Armstrong while continuing to support the cancer research foundation he founded.
May 23, 2013
T. Rowe Price Introduces a new line of target-date funds that feature a more conservative glide path.
The new funds’ glide path differs from that of the existing funds by as much as 14.5 percentage points in equities at 10 years from the target date. The new funds are anticipated to invest 42.5% in equities at the target date, versus 55% for the existing product line.
June 14, 2013
Vanguard Target Retirement Funds
The Vanguard Short-Term Inflation-Protected Securities Index Fund, launched in October, replaced an actively managed broad-market TIPS fund used in the suite, and a cash allocation was also removed, erasing the last vestiges of active management.
Target Date Fund Facts
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Date of
Change Family or Manager Target Date Fund, Description of Change
August 7,
2013 Fidelity Investments Freedom Funds Changes to the investment objectives, benchmarks and names of some of the underlying investments within its target-date lineup. Fidelity Series Mega Cap and Advisor Series Mega Cap will be renamed the Fidelity Series Growth & Income and Fidelity Advisor Series Growth & Income. The funds have also been given a new benchmark: The S&P 500 Index will replace the Russell Top 200 Index.
August 20,
2013 Franklin Templeton LifeSmart Target Date Funds
Added four funds, incorporating "to retirement" targets at five-year intervals. The new funds are pegged to the retirement target years of 2020, 2030, 2040 and 2050, complementing the existing funds for 2015, 2025, 2035 and 2045. September
27, 2013
Fidelity Investments Freedom Funds
Revamp of target-date funds’ glide paths by increasing equity allocations at the expense of short-term debt, among other asset classes.
The new allocations reflect Fidelity’s analysis of research on investor behavior and demographics, including the trend of delayed retirements, as well as on secular-based capital markets assumptions and new assessments of investors’ ability and tolerance for withstanding portfolio volatility or losses.
The new allocations will result in a 43% domestic equity target for the Freedom 2020, from 39% currently, while the international equity target climbs from 14% to 18%, bond funds fall from 39% to 32%, and short-term funds from 8% to 7%.
Target Date Fund Facts
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Target Date Fund Universe
Ratings are performed for Target Date funds that existed during Critical Periods that tested the ability of the funds to meet their primary goals of capital preservation and market appreciation. In order to be rated, the fund must have been in existence for the full calendar year of each Critical Period.
The Critical Periods are:
2009: Up year that tested capital appreciation
2008: Down year that tested capital preservation
2011: Turbulent year in which both capital preservation and appreciation were tested
2012: Most recent year that establishes that the fund is still viable The total universe of Target Date Funds is xxx, of which yyy qualify for ratings.
