Last year was a glass half-full/half-empty time for target date funds. On an absolute basis, target date funds had a respectable showing in 2016—with the median manager returning 7.16%. At the same time, that manager failed to outpace the Callan Target Date Index, underperforming by more than half a percentage point for the year.
Further, target date funds suffered because of their developed non-U.S. equity exposure, which ranges from 8% for near-dated funds to 21% for long-dated funds. While the S&P 500 Index jumped 12% for the year, the MSCI EAFE Index saw a paltry 1% annual return. Notably, that works against managers when comparing their results to benchmarks, since nearly a quarter of DC plan sponsors report that they evaluate their target date funds’ performance against broad market indices such as the S&P 500 for Department of Labor-required participant disclosures, according to Callan’s DC Trends Survey.
In the fourth quarter, target date funds underperformed the Callan Target Date Index for the fifth time in a row.
And while the spread between the best and worst managers narrowed, funds in the bottom 90th percentile posted declines of -0.14%, compared to the median fund’s fourth quarter increase of 0.35%. For the trailing year, the median target date manager produced a 7.16% gain, with the best performers up 8.17% and the worst returning 5.07%.
With the Bloomberg Barclays U.S. Aggregate Index falling 2.98% for the fourth quarter and 2.65% for the year, near-dated vintages were hindered by their fixed income exposure and performed worse than long-dated vintages. The median 2010 target date fund lost 0.42% in the fourth quarter but was up 6.29% for the year. In contrast, the median 2050 target date fund gained 1.29% in the fourth quarter and 8.77% during the year.
Over the longer term, target date funds narrowly prove their mettle, with the median target date manager outperforming the Callan Target Date Index by 28 basis points annually over the trailing five-year period.
The median target date fund’s expense ratio is 0.57%, ranging from 0.78% in the 90th percentile to 0.14% in the 10th percentile. Much of the difference is driven by active versus passive implementation of target date glide paths.
The Callan Target Date Index – Average of All Vintages chart gives a snapshot of the performance of the Callan Target Date Index. We show the aggregate performance of the universe of target date funds at a glance by equally weighting every “vintage” within the target date fund glidepath (e.g., 2015, 2020, 2025, etc.). The charts also shows the range of performance of the Callan Target Date Index members, similarly weighted.
The Callan Target Date Index Asset Allocation chart provides insight into the underlying asset class composition of the Callan Target Date Index over the full asset allocation glidepath. Multiple views offer varying degrees of detail into asset allocation. The Macro Level View depicts the allocation over the course of the Index's glidepath (40 years before retirement and 20 years after retirement) across nine major asset classes. The Micro Level Views show the allocation over the course of the Index's glidepath broken out into much more granular asset classes with options to examine equity and non-equity asset classes separately.
The Equity Rolldown Analysis chart displays the Callan Target Date Index’s equity allocation (excluding commodities and REITs) across the full asset allocation glidepath, including 40 years prior to and 20 years after retirement. The full range of equity rolldowns across all funds in the Callan Consensus Target Date Index is represented in grey.
The Expense Ratio Analysis shows the distribution of expense ratios for funds within the Target Date Fund Index. The group includes the lowest fee share class of mutual funds as well as collective trusts. For this universe, the median expense ratio is 0.57%; the 10th percentile is 0.78%; the 90th percentile is 0.14% (i.e. the higher the fee, the lower the ranking). This fee data will be updated on an annual basis.
The Callan Target Date Index is an equally weighted composite of 44 target date fund series, including both mutual funds and collective trusts. It is updated quarterly. To accurately benchmark a target date fund it is essential to determine an appropriate target date fund index. Many current target date indices simulate capital markets and derive an artificial glidepath to create a suite of target date indices.
This approach could be labeled biased or subjective – or even worse, arbitrary – because it does not objectively represent the target date opportunity set. After all, if a given target date fund’s performance differs from such an index, what does that really signify that is meaningful from an evaluation perspective? To avoid this problem, Callan constructed a consensus glidepath that is driven by the actual glidepaths offered within the industry.