With U.S. investors under 30 putting a large portion of their defined contribution pension investments in target-date funds, the industry is growing quickly, Vanguard’s Matthew Brancato told the 2016 DC Investment Forum.
“The TDF industry is a $1.2-trillion industry today, and that’s expected to grow to $3 trillion over the next couple of years in the U.S.,” said Brancato, a department head with Vanguard’s institutional investor group. The Canadian market is on a similar trajectory, he added.
With growing popularity, however, comes increased scrutiny. As due diligence and customization become prime concerns, plan sponsors must do more to consider what the right target-date fund looks like. Brancato said the key is to pick the right mix of assets and determine how the glide path changes over time. The glide path is a key part of constructing a target-date fund, he added. “The glide path is a mix of risky and defensive assets, like stocks and bonds.
The strategic asset allocation in your portfolio drives about 90 per cent of the long-term return variability, so choosing the right glide path is critical.”
But according to Brancato, glide-path customization is only one part of the dialogue around custom target-date funds. “TDFs can be customized across a number of different dimensions,” he said. “You can customize the glide path or the underlying sub-asset allocation or you can customize the underlying funds.”
It’s important, however, to weigh the benefits against the added costs. “It’s critical to take them into account, [because] in many cases, the incremental cost to customize ends up being greater than incremental benefits,” said Brancato.
Read more articles from the 2016 DC Investment Forum