Target date fund evaluation: A guide for plan sponsors

Over the past 30 years, target date funds, or TDFs, have become the dominant investment option provided by retirement plan sponsors—85% of 401(k) plans now offer them (PDF), according to the Investment Company Institute—and many participants allocate their entire account balance to a single fund. This reliance raises the stakes for plan sponsors, who must act prudently to meet their responsibilities under the Employee Retirement Income Security Act, or ERISA.

Target date fund evaluation is a key fiduciary duty for plan sponsors, but today's marketplace is increasingly complex. Rather than expecting internal investment committees to conduct highly technical assessments on their own, many employers are turning to a data-driven, expert-led approach that considers a robust set of criteria—all while reducing fiduciary exposure.

How do target date funds work?

A target date fund automatically adjusts its asset allocation between stocks and bonds based on a predetermined retirement date. Generally, TDFs shift from growth-oriented equity exposure to a higher share of fixed-income investments as participants approach retirement, offering them a single-fund solution for long-term investing.

The glide path—or how the fund shifts between stocks and fixed-income allocations—is the core of a TDF's design. In general:

• To glide paths stop reducing equity exposure at retirement
• Through glide paths continue reducing equity exposure after retirement

For plan sponsors, understanding the glide path is essential because it reflects how the fund manages risk for participants nearing and during retirement. The challenge is that glide path selection requires more than comparing equity ratios. It also involves understanding workforce behavior, retirement timing, income levels and employee response to market volatility.

Why you need more than a TDF checklist

Under ERISA, plan sponsors are responsible for making prudent, well-documented investment decisions. However, the analysis needed to evaluate TDFs effectively has become more complicated in recent years.

• Fee compression has narrowed cost differences among leading managers, requiring more nuanced assessments.
• Private market and semi-liquid investments raise questions about liquidity, valuation transparency and layered fees.
• Annuity components add complexity around fee structures, allocation decisions and payout mechanics.

Today, fully effective evaluation often requires extensive datasets, specialized research tools and robust benchmarking methodologies. Expecting internal committees with limited time and expertise to replicate this work can lead to increased fiduciary risk. As a result, many sponsors rely on advisory firms for technical analysis while focusing internally on their workforce needs and plan objectives.

"What matters most is aligning the fund with your participants' needs," notes Andy Johnson, Senior Director of Institutional Asset Management Sales & Service with First Citizens. "Our role is to help you translate those needs into an investment solution."

The first step in TDF evaluation

Every TDF evaluation begins with understanding the plan's participants and their demographics. For example, a manufacturing firm with employees working into their 70s may need a very different glide path than a professional services firm where employees retire closer to 60 or 65.

Advisory firms often use brief diagnostics to help sponsors think about their workforce in practical terms. For example, First Citizens typically explores questions like these to help clients decide.

• Is the plan's primary objective meeting participants' retirement income needs or maximizing savings throughout their lifetimes?
• What behavioral tendencies do participants generally display—such as savings patterns, loan activities and withdrawal habits?
• Does the plan generally prefer downside protection or higher growth potential?
• Does the plan generally value manager performance over lower fees?
• Should underlying investment strategies favor active or passive management?

Insights like these form the foundation of TDF suitability and let advisors recommend funds that align well with workforce demographics and plan objectives.

Holistic criteria for effective TDF evaluation

Based on standard industry practice, several measures can help guide TDF selection. Even investment committees working with professional advisors should understand these fundamentals.

• Glide path design: Through glide paths often maintain higher equity allocations, which may enhance historical returns but also increase risk during market downturns. "Chasing returns often leads sponsors to choose riskier, higher-equity funds without considering their overall suitability," says Thaddeus Yasunaga, Director of Portfolio Management at First Citizens.
• Performance consistency: Consider how a TDF has performed across different market cycles. Focusing on consistency relative to benchmarks and peers—rather than the highest recent returns—can help sponsors make balanced decisions.
• Fees and expenses: Lower costs directly benefit participants. "Most new contributions in the industry are moving toward low-cost TDFs," Yasunaga says. "But just because a fund is the cheapest doesn't mean it's the most appropriate. What you're looking for is a series that offers the most value after taking cost into consideration."
• Active versus passive management: Passive funds generally offer wide, low-cost market exposure, but active funds may add value in highly specialized areas like international equities and fixed income. "Higher-cost options are generally correlated with active funds, and I wouldn't recommend overlooking a particularly well-managed fund that meets a lot of your other needs," Yasunaga explains. "We tend to like target date funds that are a blend of passive core allocations with active components."
• Diversification and asset class exposure: Broad diversification—including nontraditional asset classes—generally helps reduce volatility and improve long-term outcomes.
• Risk assessment and benchmarking: Metrics like maximum drawdown, standard deviation, risk-adjusted returns and upside-downside capture ratios help sponsors evaluate how a TDF may perform in volatile markets. Benchmarking against the right peer group—for example, comparing funds with similar glide paths—is also critical.
• Fund availability: Recordkeeping partnerships may limit the TDFs a plan can access. Open-architecture platforms give sponsors more flexibility and choice.
• Other considerations: Qualitative factors like the fund's investment philosophy, management experience, team stability and firm resources may also affect whether a fund is a good fit.

What to look for in an advisory partner

Because evaluating TDFs requires technical analysis, specialized tools and ongoing monitoring, many plan sponsors rely on an external partner for support. A strong advisory partner should provide the following services.

Clear assessment of participant demographics

Understanding the workforce—retirement timing, job stability, income levels and employees' comfort with market risk—helps determine the most appropriate glide path and investment approach.

"For example, when you think about a downturn in equity markets, you need to understand how participants will typically react," Johnson says. "Will they rush to sell, or will they stay the course? Your employees' level of investment acumen will help determine the appropriate risk profile."

Robust quantitative analysis

Advisors should be equipped to evaluate glide paths, risk metrics, diversification, performance patterns and fees using reliable data sources and standardized methodologies. This helps ensure comparisons are objective and grounded in the full market landscape.

"We provide metrics on performance, risk and expenses that roll into a numeric score, then supplement that with commentary to help plans interpret the results," Yasunaga explains. "In practice, this means sponsors receive not just a score but also the perspective to understand what it really means for their plan."

Clear documentation and rationale

A partner should provide written explanations of the selection and assessment process so plan committees can demonstrate prudent oversight and maintain strong fiduciary records.

"We encourage clients to establish a retirement plan committee responsible for oversight of the plan," says Ciji Fisher, Director of Institutional Client Services at First Citizens. "We help them build that structure and document ongoing reviews so they meet their fiduciary responsibilities."

Reducing liability as a 3(38) fiduciary advisor

Working with an advisory partner who's a 3(38) investment manager—defined under Section 3(38) of ERISA—is another key advantage. A 3(38) can function as a fiduciary, meaning they're legally responsible for selecting, monitoring and replacing plan investments.

"Not every asset manager can act as a 3(38) fiduciary," Johnson says. "Although choosing First Citizens as a plan's 3(38) fiduciary does not completely alleviate a plan sponsor's fiduciary duty for oversight and monitoring, we're able to reduce the plan sponsor's fiduciary burden by assuming responsibility for investment selections, making ongoing monitoring decisions and documenting evaluation and oversight."

How to maintain strong oversight of TDF evaluation

Selecting appropriate TDFs is only the first step. To meet their fiduciary responsibilities, plan sponsors must reassess these options consistently to ensure they remain aligned with plan objectives and participant needs.

Track performance relative to benchmarks, peer groups and established risk parameters on a quarterly basis, and reassess workforce demographics, retirement patterns and overall plan objectives every year to confirm whether the TDF remains appropriate for the plan's participants.

"Quarterly check-ins help track performance, and annual reviews provide a deeper evaluation of whether funds remain suitable or if lower-cost alternatives should be considered," Yasunaga says.

Ensuring that the investment committee includes diverse perspectives can also lead to stronger governance. "Members often include representatives from varying levels of the organization—from C-suite executives to workers—as well as a delegate from human resources," Fisher explains.

The bottom line

Selecting and monitoring a target date fund series is one of the most important fiduciary responsibilities for retirement plan sponsors. But evaluating glide paths, risk controls, diversification and performance is complex—and most sponsors don't have the time or tools to do this independently.

A skilled advisory partner can help sponsors:

• Understand participant demographics and plan objectives
• Evaluate TDF options using robust institutional research
• Document decisions clearly
• Reduce fiduciary risk through 3(38) investment management

"What differentiates First Citizens is not just the tools but the relationships," Fisher says. "We take a consultative approach—getting to know our clients, understanding what's important to them and helping them navigate their fiduciary responsibilities."

Connect with an institutional asset management partner to learn how our proprietary evaluation process can help you make confident, well-documented decisions for your workforce.