I must admit to chuckling a bit during a recent target date fund kerfuffle. The target date fund family I used in nearly all of my retirement plans was exiting the space and I needed to find a replacement. Using a defendable and repeatable process, I reviewed numerous competitor target date fund offerings before finally landing on one target date investment. What made me laugh is that I first was introduced to this investment back in 1994. Funny how life comes full circle after all these decades.
The idea behind target date funds back then was pretty simple. Retirement plan participants who did not make an investment election or who were auto-enrolled into a retirement plan that offers a target date fund as its default investment would be placed in the fund that was closest to when they turned 65. The assumption is that employees will retire at 65. Target date investments are designed to be aggressive the further out a participant’s retirement year is (ie, the year 2070) and gradually become more conservative the closer to retirement a participant is (ie, the year 2035).
Target date funds have grown since 1994 to more than $4 trillion in assets under management at the end of 2024. The 2006 Pension Protection Act certainly was a help as that act stated that target date funds could be used a retirement plan’s default option.
Some questions that may come up regarding target date funds include whether a participant will retire at 65. Also, just because two employees are the same age does not mean they have the same retirement time horizon, financial risk comfort level, or even money saved.
Against this backdrop, I read an interesting article from an investment company about the possible future of target date funds.
Here are some key points plan sponsors should know:
Personalization Trend: Sponsors and record keepers are increasingly exploring QDIAs that go beyond standard age-based TDFs to reflect broader participant characteristics and preferences. The question is whether the plan’s record keeper can provide the relevant data to aid in personalization.
Enhanced Target Date Options: Next-generation target date offerings may include: Stable value allocations within target date series to reduce volatility and potentially lower fees. Blended vintages combining multiple target dates to better match individual risk tolerance or income timing rather than strictly retirement year buckets. These require participant or demographic data and sophisticated tools, which can complicate implementation.
Multiple Glide Paths: Some providers now offer conservative, moderate, and aggressive glide paths within the same series. Sponsors could default the entire population into an appropriate glide path based on plan-level demographics, though assigning individuals based on personal data remains operationally challenging.
Managed Accounts as QDIAs: Fully personalized managed accounts represent the highest level of customization by using individual financial data to construct portfolios. However, they come with higher overlay fees and require participant engagement and meaningful data sharing to justify the cost and differentiable outcomes versus standard target date funds. My thoughts are that these accounts are too new and do not have the track record to “prove the case” to a plan’s investment committee.
Fiduciary Considerations: Any move toward tailored or personalized QDIAs still requires rigorous due diligence. Sponsors must evaluate costs, investment processes, data security, and practical participant outcomes no differently than with traditional fund selections.
The Parting Glass
The direction toward personalization reflects a valid desire to better meet diverse participant needs, but it carries trade-offs in complexity, cost, and engagement. Off-the-shelf target date funds remain a highly efficient and defensible default for most populations. Any shift toward customized QDIA structures should be driven by a clear, documented rationale tied to your workforce demographics, operational capabilities, and a thorough comparison of expected value versus costs.