In recent years, many retirement plan sponsors have enhanced retirement plans by introducing target-date funds* (TDFs) to bolster employees’ retirement readiness. Target-date funds typically invest in a variety of investments selected for those who plan to retire during the target date year. Whether you’re an architect participating in a retirement plan or a firm owner sponsoring a plan for employees—or you’re considering sponsoring a plan for yourself or for others, it’s important to understand this investment option.
Target-Date Funds Defined
Target-date funds are investment vehicles that automatically reset their asset allocations over time to maintain a risk profile that is appropriate for a particular investor’s “target date” for retirement. Generally, the name of each TDF in a series includes a specific year, such as “2020” or “2030.” Plan participants choose a fund named for the year closest to their desired retirement year. From that point on, professional money managers handle the investment decisions, such as selecting individual securities for the portfolios and rebalancing the fund’s asset allocations so that they become increasingly conservative the closer a participant gets to retirement.
Rapid Adoption Rates
Over the past several years, target-date funds have enjoyed a rapid ascent in the defined contribution plan space, surging from less than $100 million in total assets in 2005, to more than $500 million in 2013.1 According to an Investment News, March 26, 2014 article, it is estimated that by 2018, TDFs will garner more than 63% of total defined contribution plan participant contributions and account for 35% of total 401(k) plan assets.
Simplicity for Participants, Heightened Oversight for Sponsors
Plan participants gravitate to target-date funds for their simplicity. For instance, 84% of participants surveyed recently cited the risk management and asset allocation features of the funds as being “very important,” while 42% were attracted to TDFs’ built-in, “set-it-and-forget-it” diversification qualities.
The introduction of target-date funds, especially when TDFs are used by plan sponsors as a default investment option also known as a qualified default investment alternative (QDIAs), can heightened plan sponsor oversight since (QDIAs) are used as appropriate investment option when a plan participant doesn’t make an investment choice.
Key Selection Considerations
When evaluating the best target-date fund series to use as the default investment option for their retirement plan, plan sponsors may consider many factors, such as:
Participant demographics. Understanding the makeup of your participant population is the first step in selecting a TDF family. What is the average age of the participant population and does it skew toward younger or older workers? What is the average deferral rate and account balance? What is the average compensation level? These and other variables may influence your selection decision.
Glide Paths. The term “Glide Path” refers to the formula that dictates the asset allocation mix of a target date fund. Each family of TDFs has a unique Glide Path structure that determines its potential risk/return profile. As a general rule, when assessing the Glide Paths of various TDF families, spend some time assessing the specifics of their asset allocations. Determine what the minimum and maximum equity and fixed income allocations of the funds are, and how they shift over time. Further, some Glide Paths freeze asset allocations at fixed percentages once the target date is reached, while others remain active, continuing to adjust allocations well into the retirement years—long past their target date.
Setting Up the Retirement Plan You Need
Target Date Funds are available through the AIA Members Retirement Program. Plans can be established for as few as one-person firms – or many employees – with a variety of retirement savings and distribution vehicles through AXA Equitable that can assist you in achieving your goals. With over 47 years of experience working with association members and 25 years specializing with architects. AXA Equitable can help you review your options and offer you choices that will alleviate the burden of establishing and managing a retirement savings plan. It’s one of the ways that the AIA Trust makes it easier for you to focus on doing what you do best: architecture.
Please call 1-800-523-1125 to speak with a Retirement Program specialist or visit us at www.TheAIATrust.com/retirement-plans/ to learn more about Target Date Funds and how you can start saving today.
For more information, please review the following articles:
- Deloitte, Target Date Funds and Retirement Savings; March 2010 – https://www.dol.gov/sites/default/files/ebsa/researchers/analysis/retirement/deloitte2009-4.pdf
- Investment News, “Target date funds to capture 63% of 401(k) contributions by 2018,” March 26, 2014.
- Aon Hewitt news release, “Aon Hewitt Survey Finds Employers Boosting Efforts to Help Workers Save for Retirement,” October 30, 2013.
- PlanPILOT, LLC, “Target-Date Funds: It’s Time to Take a Closer Look.”; June 2013
* Target-date funds typically invest in other investments and are designed for investors who are planning to retire during the target date year. The fund’s target date is the approximate date of when investors expect to begin withdrawing their money. A Target date fund’s investment objective/strategy typically becomes more conservative over time primarily by reducing its allocation to equity investments and increasing its allocations in fixed-income investments. An investor’s principal value in a target-date fund is not guaranteed at any time, including at the fund’s target date. Investing is subject to market risks including loss of principal.
Important Note: AXA believes that education is a key step toward addressing your financial goals, and we’ve designed this material to serve simply as an informational and educational resource. Accordingly, this discussion does not offer or constitute investment advice and makes no direct or indirect recommendation of any particular product or of the appropriateness of any particular investment related option. Your needs, goals and circumstances are unique, and they require the individualized attention of your financial professional. But for now, take some time just to learn more.
This article is provided for general information purposes only. This material does not constitute an offer or solicitation of any kind and is not intended, and should not be relied upon, as investment, tax, legal, or financial advice or services. Securities offered through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC. Annuity and insurance products, including those issued by AXA Equitable Life Insurance Company (NY NY), offered through AXA Network, LLC, which conducts business in CA as AXA Network Insurance Agency of California, LLC, in UT as AXA Network Insurance Agency of Utah, LLC and in PR as AXA Network of Puerto Rico, Inc. The retirement plan would be funded by an annuity contract issued and distributed by AXA Equitable Life Insurance Company (AXA Equitable), New York, NY. Annuities contain certain limitations and restrictions. GE-126453 (6/17) (Exp. 6/19)