See Index-Based Target Date Funds Differently

From an aerial view, a neighbourhood of similarly fashioned homes can all look the same. Same roof pitches and rectangular lawns, same swing sets and shrubbery. But as the lens comes closer, zooming in on the intricacies of each property, each structure, each appliance and electrical system, stark differences emerge. It’s within these differences that the home’s value can begin to be measured and a true comparison of benefits revealed.

Within the world of index-based target date funds (defined here as TDFs), relying on the aerial view to ascertain value can be as deceiving as estimating home prices from 50,000 feet in the air. A closer inspection is required.

Here, we explore three TDF dimensions and the nuanced value they deliver.

1 Structure could Impact Value 

Is it a tool shed or a work shop? While both structures contain the instruments required to get the job done, the better-equipped work shop supports a more sophisticated result. Similarly, TDFs that are structured as ERISA-qualified collective investment trusts (CITs), instead of mutual funds, are able to offer distinct advantages to participants; such as greater opportunity for low cost trading (vis-à-vis unit and security crossing), more pricing flexibility, increased portfolio diversification without additional investment management fees, and reduced tax exposure on dividends.

Though they serve the same objective of populating TDFs with diverse, underlying index funds, CITs and mutual funds are not equal or interchangeable entities. Some leading providers may appear to offer CITs, but their structures are underpinned by mutual funds, creating a circular reference that doesn’t deliver CIT-specific advantages.

For sponsors, understanding the fund structure is critical to evaluating the value that it offers participants.

2 Thoughtful Diversification could Benefit Outcomes

Is it an in-ground pool or an in-law suite? Unique property features can broaden a home’s appeal and increase its value on resale, but they can also become a burden if not properly maintained. However, if done well and looked after carefully, these property attributes can buffer the home value through housing boom and bust cycles. The inclusion of diversifying asset classes within a TDF has a similar effect. The diversification is meaningful to the overall portfolio across market cycles, but must be carefully managed, beginning with index methodology.

Including commodities, high-yield, and other diversifying assets in TDFs could improve risk-adjusted returns, mitigate specific risks (such as inflation), and potentially increase net retirement savings.

Some competitors say the contribution of diversifying assets comes at too high a price: increasing cost, introducing complexity, lowering transparency, and reducing liquidity for both plan sponsors and participants. At State Street, we are mindful of these potential pitfalls and vigilant in side-stepping them, beginning with the thoughtful employment of a CIT investment structure as well as specific indexes designed to maximize potential return while monitoring volatility.

3 Choice is an Advantage in Securities Lending

Is the roof covered in solar panels or simply shingles? While solar panels can offer the rewards of lower utility bills and environmental stewardship, they also introduce risks, such as potentially complex installation and unforeseen maintenance costs. For plan sponsors, choosing securities lending offers a similar challenge in striking the right balance between potential risks and rewards.

But choice is not always available. Some leading managers only offer TDFs invested in mutual funds and automatically engaged in securities lending.

In such scenarios, the limit of the offering translates into limits on sponsors’ decision-making autonomy.

While a well-managed securities lending program can add attractive risk-adjusted returns to participants’ portfolios, program success depends on plan sponsor buy-in and ongoing participant education. Not all organizations embrace this complexity; instead, a solid set of shingles adequately cover their needs. To accommodate a range of appetites and aptitudes, State Street offers lending and non-lending solutions, delivering plan sponsors the benefit of choice and participants the value of clarity.

The Bigger Picture

Using such a singular criteria as cost to evaluate TDFs assumes that all options are created equally – a myopic perspective that we hope to have brought into focus. 

Pulling our lens back from the neighbourhood we have been so closely inspecting, we can now see in greater detail the opportunities and limitations contained within each property. For State Street, this means a more detailed and sound structure (CITs), the availability and careful oversight of unique features (diversifying asset classes), and the choice of additional complexity (securities lending). When brought under one roof, these value dimensions total to more than just curb appeal; they deliver a seamlessly sophisticated investment structure.


A Collective Investment Trust (CIT) is also known as a commingled or collective fund. CITs are: Increasingly used in defined benefit (pension) plans and defined contribution (401k) plans.

Mutual Fund
A mutual fund is an investment vehicle made up of a pool of moneys collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets.

Securities Lending
Securities lending is the act of loaning a stock, derivative or other security to an investor or firm. Securities lending requires the borrower to put up collateral, whether cash, security or a letter of credit. When a security is loaned, the title and the ownership are also transferred to the borrower.


The views expressed in this material are the views of SSGA Defined Contribution as at April 30, 2018, and are subject to change based on market and other conditions.

This document contains certain statements that may be deemed forwardlooking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Investing involves risk, including the risk of loss of principal. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.

Diversification does not ensure a profit or guarantee against loss.

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Exp. Date Mar 31, 2020