Target Date Funds

Companies hope that their employees can retire with dignity, but many of them can no longer afford to offer defined benefit plans. As a retirement plan sponsor, believing that Social Security can provide anything more than supplemental income in retirement is naïve. Nor should you think that outside savings are going to act as anything more than a supplement to retirement income. The former is too taxed and the latter too underutilized. The most accessible path to retirement savings is a defined contribution (“DC”) plan. These DC plans are a blunt tool of saving for the future. Saving earlier and saving more as time goes on are key indicators of your employees’ ability to replace their income when they retire. Auto-enrollment in your plan and auto-escalation of their contributions help solve for those issues.

How, though, does a novice investor know where to invest the money being saved? I, for one, love the idea of target date funds (“TDFs”). TDFs allow investors to “set it and forget it.” Their allocations become more conservatively invested on the approach to retirement. TDFs eliminate the need to make decisions. TDF series (multiple funds tied to different expected retirement ages) have become the go-to default options for many retirement plans.

The graph above shows the difference in investment allocation between two hypothetical TDF series. Example 1, in orange, has lower equity exposure over time than does Example 2, which is more aggressive during a participant’s career. Most plans offer only one series (for example either 1 or 2), but plan sponsors must choose which glidepath is the best for their participants. Imagine the above graphic with dozens of lines representing different TDF series. There are a lot of inputs into the decision – other retirement plans available to participants, longevity of the workforce, expenses and others – but one thing that the consulting industry has struggled with is providing consistent benchmarking on the performance of these funds. Consultants specialize in benchmarking, so why would this be a problem Think about the right side of the glidepath from the example above. Example 1 ends with 20% in equities and Example 2 has 50% in equities in retirement. Depending on your preference and timeframe, either can be considered the correct way to invest, but over short periods of time, the differences between the two (and asset allocation is the lion’s share of the differences amongst TDF series) can be substantial.

As a plan sponsor, you should understand your TDF series and the selection process you went through. You also need to monitor it for fit to your specific needs, but you need not and should not overreact when short periods of market performance negatively impact your peer group or benchmarks. If you understand your workforce and make an informed decision, you should remain confident that you have fulfilled your fiduciary duty. If you are unsure of what the appropriate glidepath is or even what glidepath your employees are on, you should call on a firm that has decades of experience in the matter.

Securities Offered Through M Holdings Securities, Inc. A Registered Broker/Dealer, Member FINRA/SIPC. Investment Advisory Services are offered through Cornerstone Advisors Asset Management, LLC. Cornerstone Advisors Asset Management, LLC and Cornerstone Institutional Investors, LLC are independently owned and operated. Cornerstone Institutional Investors, LLC is a member of M Financial Group. Please go to mfin.com/Disclosure for further details regarding this relationship. For important information related to M Securities, refer to the M Securities’ Client Relationship Summary (Form CRS) by navigating to mfin.com/m-securities.

This report was prepared by Cornerstone Advisors Asset Management, LLC / Cornerstone Institutional Investors, LLC and reflects the current opinion of the firm, which may change without further notice. This report is for informational purposes only and is not intended to replace the advice of a qualified professional. Nothing contained herein should be considered as investment advice or a recommendation or solicitation for the purchase or sale of any security or other investment. Opinions contained herein should not be interpreted as a forecast of future events or a guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s portfolio. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. 6499499.1