Target-Date Radar Methodology

Introduction

Target‐Date Funds (TDFs), which were intended to simplify the retirement investment decision‐making process and ongoing portfolio management needs of plan sponsors and participants, have ironically added a layer of complexity all their own. The rapid growth of the TDF universe has led to a vast and expanding range of construction methodologies, asset allocation frameworks, demographic assumptions, management techniques and fees across all the products in the market. The MPI Target‐Date Radar tool was developed to help advisors and consultants better assist plan sponsors in determining which TDFs are most suitable for their plans and do so with a repeatable and documented process.

In 2013, as the popularity of TDFs in defined contribution (DC) plans attracted regulatory attention, the DOL published a general guidance1 document designed to assist plan fiduciaries in selecting and monitoring TDFs. The guidance set forth that when selecting or recommending a TDF fund, one should employ the following standards:

  • Establish a process for comparing and selecting TDFs.
  • Establish a process for the periodic review of selected TDFs.
  • Understand the fund’s investments – the allocation in different asset classes (i.e., stocks, bonds, cash), the individual investments themselves, and how these will change over time.
  • Review the fund’s fees and investment expenses.
  • Document the process.

MPI developed Target‐Date Radar with these standards in mind and created a systematic process to evaluate, screen, and report on TDF products. The process can be outlined in the following 3 steps:

Step 1: Suitability Questionnaire & Scoring

The suitability questionnaire was designed to create a meaningful interaction between the advisor/consultant and plan sponsor by working together to fill out and understand the plans preferences and demographics.

  • The plan demographics & preferences are captured across MPI’s “5 Pillars” of Suitability.
  • The Questionnaire is processed and a unique multi‐variable rating system is built specific to the plan.
  • The most suitable TDF products are identified and each TDF receives a Suitability Score.

Step 2: Suitability Overview & TDF Selection

This interactive step was designed for internal use by the advisor/consultant to review suitability results alongside additional metrics that are not part of the suitability scoring process (such as returns, or expenses), and select up to 4 finalists for comparison in the next step.

  • Plan‐specific suitability results are calculated and visually presented.
  • An interactive Search, Comparison & Monitoring module provides a full spectrum of analytics, qualitative data and suitability metrics through MPI’s visualization dashboards.

Step 3: In‐depth Reporting of Selected TDF Fund Families

Suitability results are summarized in a consolidated document designed for client consumption. The report can be used to support the initial search/selection process, or to conduct periodic reviews of selected TDFs.

  • Client‐friendly, yet comprehensive report compares multiple fund families and documents suitability results, questionnaire responses, and plan demographics. Combines Returns‐based and Holdings‐based analytics.
  • Suitability scores are not shown in the final report. MPI’s suitability score is designed to help guide the overall selection process up until this point.
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