The Evolution of Target Date Funds in Retirement Plans

Since their creation more than 25 years ago, target date funds have become a retirement savings staple.

Target date series are designed to simplify the investment process for retirement plan investors by offering funds that align with a broad range of employee retirement timelines. Benefits include:

• A simplified fund selection process designed for employees who may not be familiar with basic investment principles.
• Broadly diversified, professionally managed, risk-appropriate portfolios tailored to a participant’s age or retirement time horizon.
• Consistent, long-term investment process designed to address the broad objectives of retirement savers.

Over the years, target date fund strategies have evolved to reflect changes in technology and investment preferences. The earliest fund families used actively managed mutual funds, but as index funds gained popularity in the years following the Great Financial Crisis, passive target date series began to dominate the market. More recently, hybrid funds that combine active and passive strategies have begun competing for retirement plan assets, drawing on the strengths of both management styles.

One example is the Natixis Sustainable Future Funds^®, launched in 2017. While built on a target date fund chassis, they offer five key differences from more traditional offerings:

1. Hybrid approach that leverages the benefits of both active and passive investment strategies.
2. Range of asset and vehicle types including separately managed accounts that can be customized to complement other portfolio holdings.
3. Multiple investment managers to support strategic diversification.
4. Diverse investment styles including high tracking error and low tracking error strategies.
5. Intentional selection of managers that use ESG considerations in their decision-making processes in an effort to drive better financial outcomes for participants over the long run.

ESG (environmental, social, governance) analysis can apply broadly across most asset classes, making it valuable information for long-term, multi-asset investments. To learn more about the evolution of target-date funds, read the full paper by portfolio manager Christopher Sharpe. 

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By Christopher Sharpe, CFA®