The advent of the Target Date fund was back in early 1994 (as detailed in an earlier post). As TDFs grew in popularity and more plans/advisors/participants starting using them, a question arose as to how properly measure a TDF's performance.
By Clayton Fresk on October 2, 2019
The advent of the Target Date fund was back in early 1994 (as detailed in an earlier post). As TDFs grew in popularity and more plans/advisors/participants starting using them, a question arose as to how properly measure a TDF’s performance. While easy to compare one TDF series to another in regards to risk/return statistics, for many years there was a lack of a standardized benchmark to measure against.
Currently in the market, there are three main target date index providers (with a 4th broad option as well). While we will go more in-depth into each series in following posts, here is a high-level overview of each.
Standard & Poor’s (S&P)
The S&P Target Date Index series is a survey-based index. The S&P will survey the industry annually as to the equity and fixed income exposure at various vintages. After adjusting for outliers, it then summarizes the exposure to create an industry baseline exposure at said vintage. As discussed in an earlier post, some TDF issuers stop decreasing equity at retirement (“To” retirement funds), and others continue decreasing equity exposure past the retirement date (“Through” retirement funds). As such, S&P has created three separate indices to allow for a more concise comparison.
- S&P Target Date: captures all the TDF who meet criteria
- S&P Target Date Through: captures only the Through TDF who meet criteria
- S&P Target Date To: captures only the To TDF who meet criteria
The Dow Jones Target Index series is a rules-based index. The index provider has determined a pre-set asset allocation at the various vintages, as well as a preset sub-asset allocation strategy. Within the Dow Jones suite there are two sets of indices:
- DJ Target: utilizes domestic equity, international equity, and fixed income exposure
- DJ US Target: utilizes only domestic equity and fixed income exposure
The Morningstar Target Index series is also a rules-based index. A committee meets annually to determine if any changes to the overall asset allocation as well as sub-asset allocation are needed. Within the Morningstar suite there are three sets of indices:
- Morningstar Lifetime Aggressive – has a higher level of equity at each vintage
- Morningstar Lifetime Moderate – has a moderate level of equity at each vintage
- Morningstar Lifetime Conservative – has a lower level of equity at each vintage
A 4th broader bucket of indices are custom indices. These can come in a couple different forms:
- Issuer can work with an index provider to create a rules-based index. These would be a set asset allocation mix, but the rules can be opaque depending on the issue and index provider.
- Issuer can compare themselves to a custom blend of indices (equity/fixed) at set percentages. These are determined by the issuer but are generic and are not run through an index provider
As I mentioned, we will delve into more detail on each of these providers in subsequent posts.
Author: Clayton FreskClayton Fresk joined Stadion Money Management in 2009 and currently serves as Portfolio Manager of Stadion’s Retirement investment strategies, which comprises oversight of Stadion’s managed account, target-date, and risk-based strategies. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Clayton holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Minnesota. He also received an MBA degree and a Bachelor's degree in Finance & Marketing from the University of Minnesota.
There is no guarantee of the future performance of any Stadion account. Material has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Results based on available universe of Target Date Fund Series, which includes registered mutual funds, and non-registered collective investment funds and insurance accounts. Collective investment funds and insurance accounts are only available for investment to qualified retirement plan assets such as 401(k) plans.
The commentary, analysis and opinions expressed are those of Stadion’s investment Team. The commentary, analysis and opinions referenced are as of the date of publication and are subject to change without notice. This material is for informational purposes only and should not be considered investment advice. This is not a recommendation to buy or sell a particular security. The investment strategy or strategies discussed may not be suitable for all investors.
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