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TDFs with ETFs

Stadion Money Management has created a new target date solution that's designed to mitigate the one-size-fits-all "Achilles heel" of traditional target date funds. With TargetFit, Stadion aims to address this and other limitations of traditional target date strategies while keeping the ease of use and familiar structure.

"We see a move towards giving participants more than just a one-size-fits-all solution, which is the way most target dates are built," C. Todd Lacey, chief business development officer at Stadion Money Management, told ThinkAdvisor. "So your traditional target date funds, they've served a great purpose, but they've been somewhat limited in their approach — meaning every person is invested the exact same way based on their age."

While the number of target date funds has grown significantly in recent years, their overall construction has largely stayed the same. They generally offer one glide path and often invest in only a single fund family.

"Target dates have been around now for maybe 15 years. They have probably close to a trillion dollars in assets in them, and they're in many cases the single biggest holding in any 401(k) plan. And they're great when you compare them to people doing it on their own," Lacey said. "But the next question is 'Are they good enough?' And we're really looking at it as we think we can make them better for participants."

There are three specific ways that TargetFit is trying to make target date solutions better: multiple glide paths, participant education and exchange traded funds. TargetFit offers three distinct target date fund glide paths.

"What we've tried to do with TargetFit is create optionality based on people's risk profiles," Lacey explained. "So if you're more aggressive and I'm more conservative in our investor profile, we have different glide paths that we would be on."

The three glide paths offered are for a "conservative" investor, or someone who is cautious about their savings and investment choices; a "moderate" investor, or someone who doesn't mind taking some risks with their savings; and a "growth" investor, or someone who is more aggressive with investing their money and isn't fearful when their investments fluctuate.

Stadion believes that there are fundamental misunderstandings that investors have about target date strategies. According to Lacey, some participants invest in multiple funds as they attempt to diversify their investments, even though each one has diversification built in.

"People misuse target date funds because — while they seem simple to us in the industry — your average everyday person doesn't always understand them," Lacey said.

Most retirement investors need additional education about their retirement investments. That's why Stadion created the TargetFit web-based experience to include education on how target date funds work, investment risk and investor risk tolerance.

"This is not advice," Lacey explained. "We're not telling them what to do. What we're trying to do is give them a baseline education on investor types and target date funds. So they can easily read through that and get a better sense of what that is."

The third component that makes TargetFit different from the traditional target date fund: It uses ETFs as the underlying investments. According to Lacey, most target date funds are using mutual funds — often, just one family of mutual funds. "We're using ETFs from multiple ETF providers," he said. "It's kind of an open-architecture ETF approach."

TargetFit's portfolios are built with ETFs from multiple providers using a selection methodology managed by Stadion's portfolio management team. Those ETFs are packaged inside of collective investment trusts.

Unlike fixed-path target date funds, TargetFit target date funds include allocations designed to be responsive to changes in the market. With a built-in "flex" allocation, the portfolios have room to react to different market conditions, according to the firm.