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It’s time to dispel seven significant myths about “passive” target date funds and reacquaint the market with the impact of index investing.
Myth #1: All Target Date Funds are Either “Active” or “Passive”
When it comes to target date fund (TDF) selection, there is a growing concern that the retirement industry is falling back on outdated thinking by creating false distinctions between “active” and “passive” TDF suites. Indexing giants that offer target date solutions utilize index funds as their underlying building blocks to access appropriate asset classes in an effective, cost-efficient manner. However, this doesn’t mean that these target date suites are passive strategies.
Leading retirement plan advisors are cutting through the TDF myths, analyzing the full TDF universe utilizing rigorous screens to serve their sponsor clients:
Myth #2: There is No Difference Between Target Date Fund Managers
Nearly half of target date providers use a custom benchmark for each vintage in their series (see Figure 1). 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.
Figure 1: Spanning the Spectrum The Range of Benchmarks Reflects Fund Variation