Consider it a mantra for evaluating the overall benefits of target-date funds: consider the outcomes, not the averages.
Speaking at this week's Center for Due Diligence conference, PIMCO's Sean Murray, senior vice president and national retirement sales manager, laid out some the newest strategies involved in analyzing the growth possibilities and costs of TDFs for retirement advisors – with a big emphasis on both shifting the emphasis to glide path construction and mitigating the fiduciary risk involved on the part of plan sponsors.
"With so much money going into TDFs, I think we can do a much better job of analysis," Murray said. "We need to focus the conversation on what matters most. Is it savings, QDIAs and fees, or should the focus be on fees, investments and savings? That savings rate is going to be much more important than fees."
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In the end, Murray says that a savvy advisor will be able to incorporate TDF analysis into his or her value propositon, suggesting that even sophisticated investors need guidance. And by doing so, advisors can set them apart from the competition by providing their expertise and value to plan sponsors.
Part of the mindset for better analysis includes attention to three basic fiduciary rules, he added: don't follow the herd; consider both the exclusive benefit rule and the prudent person rule, at all time; and keep in mind the diversification rule, seeking to minimize large losses through diversification.
PIMCO's own TDF analysis process follows a basic framework, through which prospective TDF managers and products get a thorough once-over.
Managers in particular need special focus, Murray noted, saying that a whole lot of questions need to be asked: What's their level of client support? Their overall philosophy? What about their history of managing other asset allocation strategies? And what about their global resources?
TDF glide paths also bear serious examination.
"Some glide paths may be riskier than tolerance levels suggest, and you don't want to end up with way too much risk," he noted.
At the same time, it's important to see how fund managers can also use risk mitigation strategies to address the major market fluctuations Murray said have now become the norm every three or so years: volatility management is key.
Value of a TDF is also an imporant consideration, especially when it comes to judging passive or active management, he adds.
"Your job as a fiduciary is a little bit like a third-grade teacher. Their job is to get kids to pass the third grade. Your job is to get people above at least a basic income ratio, no matter what the environment."
Detailed TDF analysis also predicates a due diligence process that includes a very detailed RFI inquiry, Murray added.
Pimco's RealPATH analysis tool, as an example, can help dig into the details, with a dynamic volatility comparison and data on income replacement, in direct comparison to the market average glide path.
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