After Three Decades, Target Date Funds Are Still Working on Their Track Records

Target date funds are designed to mitigate risks long-term by gradually selling equities and buying bonds, moving from relatively volatile toward more conservative assets as the investor approaches retirement. It is “a form of risk management mostly on the part of the investor, the actual employee in a defined contribution plan,” says Jeff Schwartz, president of risk analytics and modeling specialist Markov Processes International.

Since the COVID pandemic struck in 2020, firms no less prominent than BlackRock, Capital Group and Vanguard have been using derivatives in managing target date portfolios. Futures and options contracts on equities, commodities and currencies are commonly cited in prospectuses.

However, derivatives trades introduce their own unpredictability, other costs and risks: the mismatch between the short-term view taken in derivatives contracts and decades-long assumptions that are baked into target date strategies; and lawsuits from investors who expect actively managed funds to outperform the passive ones that track benchmark indexes.

David O’Meara, head of defined contribution investment strategy at Willis...