Factors to Consider When Choosing a TDF

Being diversified means having a broad selection of within different asset classes, explained Lingard. For example, when it comes to bonds in a portfolio there should be a selection of both domestic and global bonds.

He also added that there are no consistent asset classes that outperform consistently year in and year out. Without the benefit of perfect foresight, it’s very difficult to predict asset class returns on a consistent basis.

“You want to look for a manager with the ability to be in different asset classes and sub-asset classes, the tools and experience to really address the diversification question because no question, it is a big job.”

Another key consideration has to do with risk management. Not all plan members share the same risk profile despite sharing the same age. Numerous factors play a role in determining risk tolerance, such as financial knowledge, age, gender, education, net worth, marital status, financial satisfaction, and household income.

In a perfect world, according to Lingard, target date managers would build a glide path for each individual investor, taking different factors into account. However, that’s not a practical solution.

For proper risk management, he explained, plan members need portfolios that address their individual risk profiles and their retirement dates.

And the last thing to consider has to do with portfolio construction. Some TDFs build a portfolio based on single style using passive securities selection and very much a hands-off approach to your asset allocation.

“But as you add more flexibility through multiple style, active securities selection and tactical asset allocation,” Lingard said, “you’re giving yourself the chance to increase your overall risk-adjusted return.”

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