Fearn describes these funds as administrative heavy because of the need for multiple funds to be created with essentially the same underlying investment strategy.
One of the big issues with target date funds is selecting the correct date.
Intelligent Pensions head of pathways Andrew Pennie says many people select their target date fund when they have little insight of when they will actually look to retire. “Taking benefits earlier than the target date could expose someone to market volatility risk and leaving a pension in a target date fund beyond the target date could represent a drag on fund performance.
“For anyone looking to remain invested, through drawdown or UFPLS (uncrystallised funds pension lump sum), target date and any ‘one-size-fits-all’ investment solution is severely limited and could result in a poor outcome.”
Budge favours lifestyling: “Greater flexibility and typically lower cost structure of lifestyle strategy designs is likely to mean these strategies will remain the most popular default option across the industry.”
FREEDOM AND CHOICE
Did the abolition of the default retirement age in 2011 and the arrival of freedom and choice in 2015, significantly impacted target date funds?
Pennie expects to see more advice driven solutions because nobody is Mr and Mrs Average. But Myers believes that target date funds remain viable for DC members. Further, their investments can adapt faster than lifestyle so they remain a strong option for these savers.
“The main problem TDFs face is not that they are no longer the right choice, but more that lifestyles were the prominent default solution for many schemes before TDFs were as established in the UK,” she adds.
“Given both provide similar solutions to each other, many have decided that the differentiation is too minimal to warrant a change.”
Todd is an enthusiast. “Far from being obsolete, the target date fund model is inherently suited to adapting to the type of regulatory change we saw with freedom and choice.
“Because asset allocations can be updated quickly and efficiently in a target date fund, it was possible for NEST to alter the glidepath members were on to more closely match what they were likely to do with their money in a post-freedoms world. And because we have a target date fund for every age group, we could put different members on different paths as appropriate.”
