1. Decision-making on cost alone is not prudent.

Plan sponsors need to consider not just the cost of a plan, but performance net of fees and glide path characteristics — both aspects of a TDF that may have no relation to the cost of the fund. 

"Plan sponsors primarily focused on cost may instinctively turn to passive, or 'indexed,' strategies because they mistakenly think these are at less risk of underperforming their investment objectives," J.P. Morgan said. 

However, it's more important to consider how the TDF performs, and also to remember that, "(w)hile a target date strategy may have indexed components, there is no such thing as an indexed glide path." Each glide path has individual risk/reward characteristics that should be considered when choosing a TDF. 

In addition, the way that a TDF accesses an asset class affects its performance. The index used by a TDF has its own characteristics that will determine how well or poorly that index will perform as a benchmark for the fund. 
2. Low cost usually requires risk-reward tradeoffs.

The report said that, as a means of reducing cost, some TDFs may not diversify sufficiently to lower risk for participants, opting to rely more heavily on U.S. equities and large-cap stocks to drive returns. 

In addition, sticking only with indexed exposure in inefficient markets can strip out the benefit of being exposed to those markets, which might provide better opportunities under active management.

3. Cost and value are not the same thing.

A TDF "may well be worth a slightly higher fee" if it can deliver "stronger investment results that deliver more participants to adequate levels of retirement savings," the report said.

It added that "broader asset class diversification," particularly in "(m)arket segments that are difficult to index effectively or price efficiently," can turn out to be "the areas that provide the greatest diversification benefits in terms of strengthened, risk-adjusted returns over the long term." 

In addition, the report said, "the ability to respond to short-term market dislocations by making slight, opportunistic shifts in asset allocations within the glide path may add meaningful return potential and help mitigate downside performance."