Best Practices Index Offers Better Choice For Benchmarking Target Date Funds
The S&P indexes measure common practices, so they are the right choice for benchmarking against Procedural Prudence, namely following the herd.
The alternative, called the “Safe Landing Glide Path,” is a best practices index, so it is the right choice for benchmarking against Substantive Prudence, namely doing what is best for participants. It’s a simple choice between common practice or best practice.
Much debate and controversy surrounds the benchmarking of target date funds. The challenge revolves around the fact that the asset allocation, and therefore risk, of TDFs changes through time. But if fiduciaries will take a step back to look at the big picture, there are really only two choices.
Procedural Prudence is satisfied when a fiduciary acts as others act in a similar capacity. The S&P Target Date Index is a good benchmark for Procedural Prudence because it is a composite of all TDF mutual funds – it’s a consensus index.
By contrast, a benchmark of Substantive Prudence reflects best practices, doing what is right for the beneficiaries regardless of common practices. This may sound like a high and mighty benchmark, but it’s not. Its derivation ties directly to something quite simple: What are the appropriate objectives for a TDF?
Common practice objectives for TDFs are to replace pay and manage longevity risk. These are not objectives at all – they’re mere hopes, and even worse they’re hypes. An objective without a reasonable course of action is a hope. One-size-fits-all-set-it-and-forget-it TDFs cannot achieve these objectives. Saving enough is the right course of action for these common practice objectives.
By contrast, reasonable objectives that represent best practices are capital preservation (don’t lose money) and earn as much as you can without losing money. These Substantive Prudence objectives can be met by following the Safe Landing Glide Path, the other choice for benchmarking TDFs.
For more information, visit Benchmarking TDFs at Target Date Solutions.
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