Target Date Funds: Utilizing a Defined Benefit Approach In a Defined Contribution World

Insight

Research

06/08/2017

David Braverman, CFA®

Managing Vice President, Equities

Target Date Funds: Utilizing a Defined Benefit Approach In a Defined Contribution World

Target Date Funds: Utilizing a Defined Benefit Approach In a Defined Contribution World

The nature of retirement investing has been fundamentally shifting over the past several decades. In recent years, employers have begun switching from defined benefit (DB) plans to defined contribution (DC) plans. With this shift, the burden for retirement planning and saving—including market risk—is increasingly being transferred from employer to employee. Plan participants, therefore, may be forgoing some key benefits, including a guaranteed monthly payment throughout retirement without bearing market and longevity risk.

Following the designation of target-date funds as qualified default investment alternatives (QDIAs) in the Pension Protection Act of 2006, target-date funds are increasingly replacing DB plans as a cornerstone retirement savings option. Here, we present our outlook for best practices and innovation in the target-date funds arena, with the view that target-date funds should incorporate features that better bridge the divide between DB and DC plans.

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1MissionSquare Funds are collective investment trust funds (CITs) established and maintained by VantageTrust Company, LLC (VTC), a wholly owned subsidiary of MissionSquare Retirement, a New Hampshire non-depository trust company, and the sole trustee of these CITs. Eligible retirement plans may invest in the MissionSquare Funds, which are funds of VantageTrust. MissionSquare Retirement’s wholly owned subsidiary, MissionSquare Investments, provides investment advisory and management services to VTC with respect to the MissionSquare Funds. Certain of the MissionSquare Funds invest in other funds managed and administered by MissionSquare Retirement or MissionSquare Investments. In those instances, MissionSquare Retirement and MissionSquare Investments receive asset-based fees from such underlying funds in addition to the asset-based fees received from the MissionSquare Fund that is available for direct investment. Please see MissionSquare Investment’s Form ADV, available at www.adviserinfo.sec.gov, for more information.

2Class R and Class S MissionSquare Funds invest in underlying MissionSquare Class M Funds that have the same investment objective and strategies. Prior to October 2016, each Class R or Class S MissionSquare Fund invested in a registered Vantagepoint Fund mutual fund that had the same investment objective and strategies. In October 2016, the Vantagepoint Fund mutual funds were liquidated and the assets were transferred to the MissionSquare Funds Class M (formerly known as VT III Vantagepoint Funds). In the event that a subadvisor to a  MissionSquare Fund was also a subadvisor to the Vantagepoint Fund that preceded it, the average subadviser tenure with the MissionSquare Fund is calculated using both time periods.