As employers face an evolving workforce and sophisticated market volatility, T. Rowe Price explains why now is the perfect time to review TDFs
Amid significant innovations in fund design, market volatility and as changing workforce demographics demand tailored solutions, defined contribution (DC) plan experts are calling for more personalized retirement strategies.
Kathryn Farrell, a portfolio specialist at T. Rowe Price, is one of those experts. She noted the industry conversation around TDFs has evolved beyond performance and fees and the once-simple act of choosing a target date solution now demands a closer look.
“There's a little bit more nuance,” she said. “There’s more choice today, and it's probably worth digging a little bit deeper.”
Farrell believes sponsors must reframe their approach to align with their plan's objectives, emphasizing that plan sponsors need to reassess how well their target date fund (TDF) aligns with the specific goals of their defined contribution plan.
She highlighted a shift from a generic approach to one that reflects the unique demographics and retirement objectives of a sponsor's participant base.
Farrell also emphasized that every TDF provider approaches portfolio design differently, and that this variance should prompt sponsors to look deeper than surface-level metrics.
“Every target-date provider designs them a little bit differently. We're all trying to get people to the goal line of retirement, but we need to think about retirement as also a journey,” she said.
She highlighted the role of equities in delivering long-term growth and stressed the importance of examining what's “under the hood” of TDFs, particularly the types of equities and fixed income investments used.
“That's really the toolkit you have to drive more durable outcomes,” she said. “If you can build something that can be sustainable and also get you through that, that’s really going to be important for long-term outcomes.”
Taylor Pidgeon, vice president of defined contribution at T. Rowe Price, warns what might have worked a decade ago could now be outdated. Plan sponsors should be actively reviewing TDFs based on their current demographic and plan outcomes.
Consequently, Farrell sees TDFs not just as investment vehicles, but as behavioural enablers.
“There’s been more recognition of the good behaviour we see in target date investors,” she said, adding that contrary to early concerns, investors tend to stay the course. “They continue to dollar cost average and then markets rally and recover. That’s good inertia.”
That inertia allows for more confidence in using equity allocations even through periods of volatility. The idea that participants will panic and exit en masse has largely been debunked, which gives providers room to optimize glide paths for long-term growth.
But the glide path isn't a one-shot formula. Pidgeon emphasized its importance in the overall return experience.
“It’s the relative level of equities versus fixed income that’s going to drive long-term outcomes,” he said.
These design decisions can have an outsized impact on a participant's ability to withstand market shocks and achieve sustainable outcomes, Farrell added.
Cost, of course, remains a contentious point as Farrell explained that active management introduces fees, but also unlocks more diverse asset classes and better responsiveness to market conditions.
Meanwhile, Pidgeon doesn’t dismiss passive investing as he believes both passive and active offer benefits and trade-offs but underscores sponsors should do their research to get a clear picture of which strategy is best for the plan, particulary when navigating through market cycles. In his view, the depth of a manager’s ecosystem is key to delivering consistent value.
“Passive gives you a limited opportunity, but it'll get you there. With active, you want to evaluate the value for cost,” he said. “Have the managers navigated different periods of market volatility before? Do they have a process in place that's collaborative and going to deliver consistently over the long term?"
Sponsors are also being pushed to clarify the roles of their service providers and ensure plan members understand their investment options. Both Farrell and Pidgeon see the revised CAP guidelines as a catalyst for reevaluation. While not a radical overhaul, the guidelines sharpen the focus on value-for-fee assessments and default investment design.
Yet misconceptions persist. Farrell believes some sponsors still underestimate how nuanced TDFs have become.
“Every manager is making active decisions,” she said. "[From] the level of equities, types of equities and types of fixed income. That’s going to influence outcomes.”
Ignoring that complexity risks mismatches between fund design and plan objectives.
When asked why target date funds continue to attract most plan member contributions, Farrell highlighted that TDFs automate the process for plan members who have no knowledge of retirement vehicles.
“They have a day job that they're trying to do. They have personal lives they're trying to navigate and so they might not have the interest or the time to try and think about, ‘Well, how should I allocate among all these building blocks, and how do I keep up with that over time?’” she said.
“They're going to have different needs from a portfolio design perspective. So target date is really nice that you can hand over the keys to someone that's going to be paying attention to it every day and they're going to adjust the portfolio for you based on your time horizon, your needs, and make sure that they're allocating appropriately,” she added.
Ultimately, Pidgeon urges sponsors to revisit their plan’s purpose. He believes sponsors should benchmark not just investment performance but also plan engagement and education efforts.
“You can have a great plan design and minimal engagement but is that really accomplishing the objective?”
“There's more opportunity to say, ‘Let’s get a solution that’s tailored for my population,” added Farrell. “That’s what plan sponsors need to be thinking about now.
