4 TDF Investing Myths: SSGA

Myth: There is no variation across TDF managers.

The report looks at recent data from Cerulli that finds that nearly half of target-date providers use a custom benchmark for each vintage in their series.

"This wide range of custom benchmarks highlights the active management decision making — such as which asset classes to use and asset allocation across target-date vintages — that occurs across the universe of TDF managers," the report states.

According to Cerulli's 2017 Defined Contribution Distribution data, almost 40% of target-date providers use a custom benchmark, compared with almost 21% that use an S&P target-date idex as a benchmark and nearly 17% that use a peer group as their benchmark.

Myth: TDFs are all created equal.

While performance comes under greater scrutiny in down market cycles, the SSGA report notes that it's the fund methodology and risk profiles — not active vs. index-based approaches — that separates the "stars from the sinkers."

The report also points to research from a Brinson-Hood-Beebower study that shows that asset allocation, not securities selection, accounts for more than 90% of return viability.

"So when people refer to active and passive, those are the securities underneath," Porteous told ThinkAdvisor. "What we're saying is it's more important, you should be more concerned about the asset allocation versus what's under it."

Myth: Fees don't matter in the "active" vs. "passive" debate.

Considering fees and investment expenses are both a plan fiduciary's responsibility and a critical dimension for evaluating actively managed and index-based TDFs, according to the report.

"Advisors who are able to provide their plan participants with an institutional-quality glide path, exposure to a broad set of asset classes, and lower fees may be able to convert and deepen their relationships," the report states.

— Check out Latest Ups and Downs of U.S. Retirement Preparedness on ThinkAdvisor.