Choosing a Target Date Fund Series: Key

Choosing a Target Date Fund Series:
Key Considerations
On the surface, many target date funds may seem indistinguishable
from one another. For example, two funds’ names might include the
same year (e.g. Target Date 2030), indicating the year their investors
anticipate retiring, and they may even have similar looking asset
allocation changes that gradually reduce equity (stock) exposure as
the funds approach that target retirement date – commonly referred
to as a glide path. But even with these common characteristics, every
series of target date funds has its own distinguishing characteristics.
Due to the fast growth in the target date category, many asset
managers have entered the space with competing products. It is
important for plan sponsors and their consultants to understand the
objectives and assumptions of the target date series they ultimately
select for their employees.
NUMBER OF TARGET DATE FUNDS
500
PHILOSOPHY AND PROCESS CONSIDERATIONS
• Risk tolerance – willingness versus ability
• Assumptions – investor and capital market
• Allocation glide path
Each participant in a defined contribution plan has a unique financial
situation and set of goals. Some plan participants’ willingness to
take on risk may exceed their ability; however, ability should take
precedence over willingness. And all target date funds are not
created equal. Different input assumptions are used when building
each target date series. The glide path is the culmination of these
assumptions – including investor and capital market assumptions and provides insight on the intended investor profile. Performance
and philosophy should go hand-in-hand. Any deviation between the
two may indicate a change in process or philosophy.
PRODUCT CONSIDERATIONS
400
• Diversification – asset classes and investment managers
300
• Expenses and assets under management
200
100
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0
Source: Investment Company Institute (ICI): 2014 Investment Company Fact Book
Target Date Fund Market Share of Defined Contribution Assets
Year
DC Plan Assets
($ Billions)
Target Date
Fund Assets
($ Billions)
Target Date
Market Share
%
1995
1,706
0
0.0%
2000
2,867
9
0.3%
2005
3,575
71
2.0%
2009
4,010
256
6.4%
2010
4,543
340
7.5%
2011
4,499
376
8.4%
2012
4,983
481
9.6%
2013
5,860
618
10.5%
Source: Investment Company Institute (ICI): 2014 Investment Company Fact Book
Every plan sponsor and financial intermediary should consider four
key areas when evaluating a target date fund series: philosophy and
process, product, performance, and people.
Once the asset allocation glide path is constructed, a target date
investment manager has a variety of options in terms of selecting
the underlying investments that constitute the fund. While asset
diversification may be an obvious objective to some, another
important consideration should be how each target date series is
diversified. Does your target date series contain only proprietary
funds of the same investment manager, or does the provider use
an open architecture approach, incorporating multiple managers?
Other important considerations include the expenses incurred by
plan participants as well as assets under management for a target
date series.
PERFORMANCE CONSIDERATIONS
• Track record of target date series and underlying funds
• Performance attribution – allocation and selection effect
Performance may not be the most important characteristic to
consider but it undoubtedly receives the most attention. Plan
sponsors should use a specific lens when evaluating target date
funds: based upon a fund series’ philosophy and design, did it
perform as intended? A long track record for both the target date
fund series and its underlying funds allows for a deeper statistical
evaluation regarding performance in a variety of market cycles.
Performance attribution provides additional information on whether
CHOOSING A TARGET DATE FUND SERIES: KEY CONSIDERATIONS
the portfolio manager is adding value through asset allocation
and/or through selection of underlying investments. And while
evaluating performance, a plan sponsor should also consider the
performance of the series’ underlying funds.
TO READ ABOUT EACH OF THESE KEY CONSIDERATIONS IN MORE
DEPTH, WE ENCOURAGE YOU TO READ OUR WHITE PAPER, TARGET DATE
FUNDS SERIES NOT ALL BUILT THE SAME: KEY CONSIDERATIONS FOR PLAN
SPONSORS AND FINANCIAL INTERMEDIARIES.
PEOPLE CONSIDERATIONS
To Learn More About PNC Funds:
• Portfolio management structure
• READ PNC TARGET DATE FUNDS: BUILT FOR RETIREMENT SAVERS
• Experience and tenure
• VISIT PNCFUNDS.COM
Multiple layers of portfolio management are involved in a target
date series. The series itself is likely managed by either a single
portfolio manager or by an investment committee. Underlying funds
used in target date funds also have portfolio management teams
responsible for respective funds. A long manager tenure at both
portfolio management levels can be a desirable attribute.
Generally, target date funds are subject to several stock and bond market risks, any of which could cause an investor to lose money. However, based
on any particular target date fund’s allocation between stocks and the less volatile asset class of bonds, the overall level of risk for such a fund will
most commonly be higher than those of funds that invest the majority of their assets in bonds, but lower than those investing entirely in stocks. As a
target date fund’s allocation of assets between its underlying funds gradually changes, its overall level of risk also will tend to decline. In addition to
the risks inherent in the asset classes of its underlying funds, a target date fund is also subject to asset allocation risk, which is the chance that the
selection of underlying funds and the allocation among underlying funds will cause the fund to underperform other target date funds with similar
investment objectives. Please refer to each fund’s prospectus for more details on the risks associated with that fund. An investment in a target date
fund is not guaranteed, and you may experience losses, including losses near, at, or after the target date. There is no guarantee that a target date
fund will provide adequate income at and through your retirement.
Asset allocation cannot guarantee a profit or prevent a loss. An investment in a target date fund is subject to the risks inherent in the underlying
asset classes in which the target date fund is invested. Interest rate risk, which is the possibility that the fund’s yield will decline due to falling
interest rates and the potential that bond prices may fall as interest rates rise. High yield bond investing includes special risks, including that
investments in lower rated and unrated debt securities are subject to a greater loss of principal and interest than investments in higher rated
securities. The values of mortgage-backed securities depend on the credit quality and adequacy of the underlying assets or collateral and may
be highly volatile. International investments are subject to special risks not ordinarily associated with domestic investments, including currency
fluctuations, economic and political change and differing accounting standards that may adversely affect portfolio securities. These risks may be
heightened in emerging markets. Investments in value companies can continue to be undervalued for long periods of time and be more volatile
than the stock market in general. Investments in growth companies can be more sensitive to the company’s earnings and more volatile than the
stock market in general. Investments in small and mid capitalization companies present a greater risk of loss than investments in large companies.
A target date fund may invest a portion of its assets in derivatives. Derivative instruments include options, futures and options on futures. A small
investment in derivatives could have a potentially large impact on a fund’s performance. A target date fund may be unable to terminate or sell a
derivatives position. Derivative counterparties may suffer financial difficulties and may not fulfill their contractual obligations.
The materials, representations and opinions presented herein are of a general nature and do not constitute the provision by PNC Funds or PNC Capital
Advisors, LLC of investment, legal, tax or accounting advice to any person or entity. Opinions expressed herein are subject to change without notice.
Information and figures upon which the materials, representations and opinions are based may be obtained from independent sources deemed reliable,
but have not been independently verified by PNC Funds or PNC Capital Advisors, and their accuracy and completeness cannot be guaranteed.
Past performance is no guarantee of future performance. This information is not intended to be a comprehensive description of any investment
product or capability. Neither the information herein, nor any opinion expressed herein, constitute an offer to buy or sell, nor a recommendation
to buy or sell, any security or financial instrument, and is not intended to serve as a primary basis for a decision with regard to whether to invest in
any security or financial instrument, including the PNC Funds. Rather, this material is intended to provide general information to assist investors
in making investment decisions based on their particular needs and circumstances. As such, the information being provided does not constitute
“investment advice” that would make PNC Funds, PNC Capital Advisors or any affiliate thereof a “fiduciary” within the meaning of Section 3(21)
(A)(ii) of the Employee Retirement Income Security Act of 1974, as amended. Investors should consider the PNC Funds’ investment objectives,
risks and expenses and their own investment objectives, goals and liquidity needs, among other things, before investing in PNC Funds. Investors
should consult their own advisors and investment professionals to evaluate the merits and risks of investments. Any case, ruling, law or regulation
discussed should be independently reviewed in its entirety before it is relied on in any particular situation.
You should consider the investment objectives, risks, charges, and expenses of PNC Funds carefully before investing. A prospectus
or summary prospectus with this and other information may be obtained at 800-622-FUND (3863) or pncfunds.com. The prospectus
should be read carefully before investing.
PNC Capital Advisors, LLC, a subsidiary of The PNC Financial Services Group, Inc., serves as investment adviser and co-administrator to PNC Funds and
receives fees for its services. PNC Funds are distributed by PNC Funds Distributor, LLC, which is not affiliated with the adviser and is not a bank.
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