Insights


The World Is Flat & Other Dangerous TDF Investing Myths

  • We believe it is time to dispel some of the myths of “passive” target date funds.
  • There seems to be confusionover index-based investing strategies. We hope to dispel the myth of “passive investing”—specifically in the target date fund (TDF) space—and refocus the discussion on solutions that can provide plan participants with an institutional-quality glidepath, exposure to a broad set of asset classes, and lower fees.


All Target Date Funds Are Active

When it comes to target-date selection, there is a growing concern that the retirement industry is falling back on outdated thinking, creating false distinctions between “active” and “passive” TDF suites.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 efficient, cost-effective manner. However, this doesn’t mean that these target-date suites arepassive strategies.

Leading retirement plan specialist advisors are cutting through the TDF myths, analyzing the full TDF universe utilizing rigorous screens to serve their sponsor clients:

  • Asset Allocation and Style Consistency
  • Performance
  • Fees

There is Variation Across TDF Managers

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.

While custom benchmarks are useful goalposts for TDF portfolio managers and client communication, they are little help to advisors who are looking to compare the performance of two target-date series. To do so, advisors need to dig under the hood, regardless of whether a target-date solution is managed by a traditionally active or index shop.

TDFs Are Not All Created Equally

Performance comes under greater scrutiny in down market cycles. However, it’s the fund methodology and risk profiles —not active vs. index-based approaches —that separate the stars from the sinkers. As shown in Figure 2, State Street was able to out-perform leading index managers during 2008’s Financial Crisis and reduce fund volatility thanks in part to our lower investment fees and our approach to glidepath construction and asset allocation.


More Insights


Over Time, Alpha Increases Performance

The State Street Target Retirement Series’ glidepath construction and lower investment fees havetranslated into superior performance, despite the fact that index-based target-date funds don’t gain potential alpha from underlying funds. Figure 3 illustrates this returns trend over a 10-year period.

Fees 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 —and there is no reason to pay more. In fact, while out-performing the competition, the State Street Target Retirement series costs less (at 13 bps) than 97% of target-date suites in the market.1 Advisors who are able to provide their plan participants with an institutional quality glidepath, exposure to a broad set of asset classes, and lower fees may be able to convert and deepen theirrelationships.

State Street is a Cut Above the Rest

SSGA has a demonstrated track record:

See how we define our 4 corners of differentiation:

1. Strategic Indexed Investment Approach

An index investing approach offers investors portfolio diversity without the bias or premiums associated with stock picking strategies. Thanks to our indexing heritage, State Street has been able to outperform our peers, even in down markets.4

2.“Through” Glidepath

Evolving to address the risks at each stage of a participant’s journey, our glidepath management is driven by academic research and a deep understanding of participant behavior —at and through retirement.

3. Well-Diversified Asset Class Exposure

With 11 underlying asset classes5—that’s double what other leading managers offer—State Street provides a granular asset allocation that’s designed to better perform in the various market environments encountered on the winding road to retirement.

4. Array of Investment Options

Because one size doesn’t fit all, State Street offers both mutual funds (A, I and K share classes) and collective investment trusts (providing multiple share classes with varying fee structures), enabling greater choice for plan sponsors.

The State Street Difference

Ongoing Monitoring

At State Street Global Advisors, Target Retirement strategy follows a disciplined, annual review schedule that is meant to capture our best thinking on glidepath design. This process is more prudent for the DC marketplace because it is transparent and easily explained to plan sponsors and investment committees.

Asset Allocation

We offer one of the most diversified suites in the market, utilizing 11 underlying sub-asset classes that shift throughout a participant’s working career. This approach is particularly evident in fixed income, an area where we differentiate ourselves from the majority of TDF managers by not relying on the Bloomberg Barclays US Aggregate Bond Index.1 Having a thoughtful point of view and more building blocks allows us to deliver tailored risk exposure to participants at every age.

Investment Style Consistency

We utilize style-neutral index funds to gain cost-efficient exposure to a broad set of beta. Some “active” managers may exhibit style drift, meaning some portfolio assets may vary in size and growth characteristics and can bounce between asset class categorizations. This volatility can be difficult for plan fiduciaries to effectively monitor and can also have a material impact on the glidepath, creating unwelcome surprises in TDF performance.

Footnotes

1 SSGA Defined Contribution, Morningstar Direct, 2017. (K Class)

2 FactSetResearch Systems Morningstar, SSGA Investment Solutions Group (ISG) as of December 31, 2017. Inception Dates: 2040, 2030, 2010. Strategies (2/05); 2020, Income Strategies (4/05); 2015, 2025, 2035, 2045 Strategies (8/06); 2050 Strategy (10/07). 2017.

3 Brinson-Hood-Beebower, 1986.

4 Morningstar Direct. Universe shown is a combination of the Morningstar Mutual Fund and CIT Target-Date categories. The lowest cost share class from each manager with an applicable track record was utilized. For SSGA, gross of fee returns with 17 bps of fees netted out were used.

5 SSGA, as of December 31, 2018.

Disclosures

State Street Global Advisors
One Iron Street, Boston MA 02210. T: +1 617 786 3000.

State Street Global Advisors and its affiliates have not taken into consideration the circumstances of any particular investor in producing this material and are not making an investment recommendation or acting in fiduciary capacity in connection with the provision of the information contained herein.

SSGA’s role as a fiduciary with respect to the products and services described herein commences only once SSGA has been retained to act in a fiduciary capacity pursuant to a written agreement and receipt of a fee. Prior to such time, SSGA is not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity in connection with the sale or distribution of the products or services described herein. SSGA has a financial interest in the sale of our investment products and services. Past performance is not a guarantee of future results.

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. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

All the performance results referred to are provided exclusively for comparison purposes only. It should not be assumed that they represent the performance of any particular investment.

Asset Allocation is a method of diversification which positions assets among major investment categories. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss.

Passively managed funds invest by sampling the index, holding a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index.

SSGA Target Date Funds are designed for investors expecting to retire around the year indicated in each fund’s name. When choosing a fund, investors should consider whether they anticipate retiring significantly earlier or later than age 65 even if such investors retire on or near a fund’s approximate target date. There may be other considerations relevant to fund selection and investors should select the fund that best meets their individual circumstances and investment goals. The funds’ asset allocation strategy becomes increasingly conservative as it approaches the target date and beyond. The investment risks of each fund change over time as it’s  investment risks of each fuits asset allocation it’s asset allocation changes.

Before investing, consider the funds’ investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus which contains this and other information on SSGA Mutual Funds call 1-800-997-7327 or visit www.SSGAfunds.com, and on SPDR ETFs call 1-866-787-2257 or visit www.spdrs.com. Read it carefully.

Not FDIC Insured • No Bank Guarantee • May Lose Value

©2019 State Street Corporation. All rights reserved.

1997554.5.1.GBL.RTL

Exp: July 31, 2020