Portfolio construction

The evolution of target date funds in retirement plans

June 25, 2024 - 3 min read

Chief Investment Officer, Multi-Asset Portfolios - Natixis Investment Managers Solutions

Since their creation in the mid-1990s, target date funds have earned the respect of retirement plan sponsors. Target date series are designed to simplify the investment process for retirement plan investors by offering funds that align with a broad range of employee retirement timelines. Benefits include:

A simplified fund selection process designed for employees who may not be familiar with basic investment principles.
Broadly diversified, professionally managed, risk-appropriate portfolios tailored to a participant’s age or retirement time horizon.
Consistent, long-term investment process designed to address the broad objectives of retirement savers.

Over the years, target date fund strategies have evolved to reflect changes in technology and investment preferences. The earliest fund families used actively managed mutual funds, but as index funds gained popularity in the years following the global financial crisis, passive target date series began to dominate the market. More recently, hybrid funds that combine active and passive strategies have begun competing for retirement plan assets, drawing on the strengths of both management styles.

A hybrid approach

One example is the Natixis Target Retirement Funds*, launched in 2017. While built on a target date fund chassis, they offer five key differences from more traditional offerings:

Hybrid approach that leverages the benefits of both active and passive investment strategies.
Range of asset and vehicle types, including separately managed segments that can be customized to complement other fund holdings.
Multiple investment managers to support strategic diversification.
Diverse investment styles, including high tracking error and low tracking error strategies.
Awareness of ESG considerations as an important component of the funds’ risk management strategy.

ESG (environmental, social, and governance) analysis can apply broadly across most asset classes, making it valuable information for long-term, multi-asset investments.

* Effective July 1, 2024, the name of the Natixis Sustainable Future Funds changed to Natixis Target Retirement Funds. Each fund’s investment goals and principal investment strategies remain the same; fund name changes are in sequential five-year periods from 2015 to 2065.

This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary.

The views and opinions expressed may change based on market and other conditions.

Equity securities are volatile and can decline significantly in response to broad market and economic conditions.

Fixed income securities may carry one or more of the following risks: credit, interest rate (as interest rates rise, bond prices usually fall), inflation and liquidity.

Foreign and emerging market securities may be subject to greater political, economic, environmental, credit, currency and information risks.

Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets.

Mortgage-related and asset-backed securities are subject to the risks of the mortgages and assets underlying the securities. Other related risks include prepayment risk, which is the risk that the securities may be prepaid, potentially resulting in the reinvestment of the prepaid amounts into securities with lower yields.

Multi-manager funds may be managed by several subadvisors using different styles which may not always complement each other. This could adversely affect performance and may lead to higher fund expenses.

ESG investment risk: The fund’s ESG investment approach could cause the fund to perform differently compared to funds that do not have such an approach or compared to the market as a whole. The fund’s application of ESG-related considerations may affect the fund’s exposure to certain issuers, industries, sectors, style factors or other characteristics and may impact the relative performance of the fund – positively or negatively – depending on the relative performance of such investments.

Inflation protected securities move with the rate of inflation and carry the risk that in deflationary conditions (when inflation is negative) the value of the bond may decrease.

Target date important considerations risk: The fund is designed for investors who will be age 65 around the year indicated in each fund's name. When choosing a fund, investors who anticipate retiring significantly earlier or later than age 65 may want to select a fund closer to their anticipated retirement year. Besides age, there may be other considerations relevant to fund selection, including personal circumstances, risk tolerance and specific investment goals.

The fund's asset allocation becomes increasingly conservative as it approaches the target date and beyond. Allocations may deviate plus or minus 10% from their targeted percentages.

Investments in the fund are subject to the risks of the underlying funds and separately managed segments. Principal invested is not guaranteed against losses. It is possible to lose money by investing in the fund, including at and after the fund's target date.

CFA^® and Chartered Financial Analyst^® are registered trademarks owned by the CFA Institute.

Before investing, consider the fund's investment objectives, risks, charges, and expenses. Visit im.natixis.com, or call 800-225-5478 for a prospectus or a summary prospectus containing this and other information. Read it carefully.

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