Benchmarking Target Date Funds Should Be An Easy Decision: Procedural Prudence

Thursday, May 03, 2012 14:04
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Benchmarking Target Date Funds Should Be An Easy Decision: Procedural Prudence

Tags: 401(k) | Due Diligence | target date funds

Fiduciaries have a duty to monitor and evaluate their target date funds’ (TDF) performance, but what's the right benchmark?

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As with all performance evaluations, peer groups are awful benchmarks. Everyone with a CFA has learned of the problems with peer groups as benchmarks. In the case of TDFs, peer groups fail because there is a wide dispersion in asset allocations across TDFs, especially near target date, so there is little comparability, despite efforts to adjust for this serious deficiency.
 
As for indexes, there is much confusion and debate surrounding the choice of index because there are so many.
 
As a practical matter, however, fiduciaries really only have 2 choices for TDF benchmarks, as described Procedural Prudence. Following the crowd could lead to lawsuits. As they say in the tax-shelter business, "check with your attorney."
 
 
The patent-pending Safe Landing Glide Path is the fiduciary Substantive Prudence choice of benchmark. One of the key criteria for a good benchmark is that it should be investable. The SMART Funds of Hand Benefit & Trust, Houston, follow the  SLGP so SMART is a benchmark. It’s a benchmark that no one beat in 2011. Shocking.  Importantly, the SLGP also makes a prudent blueprint for model TDFs.

 

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