Target-date fund providers are taking two steps forward and three steps back, according to a new report by BrightScope, dubbed Popping The Hood V, 2012.

On a positive note, the report revealed that some managers have significantly improved the prospectus language describing their funds. For example, some prospectuses now state that their funds are intended for participants expecting to take a lump sum withdrawal at or near the target date, while others state that their funds are intended for those participants intending to begin periodic withdrawals at the target date.

Also, some TDF managers are returning to the fundamental objectives of TDFs and focusing on growth only in the earlier years of the life cycle while it is safe to do so. As well, the average institutional expense ratio of all TDFs has dropped to 72 basis points from 80 bps, as of December 2006.

However, the report also noted that the trend toward more conservative glidepaths has slowed. “The percentage of fund families that bring their glidepath down to its most conservative position at the target date (our definition of a “to” fund series) remains at 42%, or just 21 out of the 50 fund families,” according to authors Craig Israelsen and Joseph Nagengast.

“Most fund companies still fail to link the fixed income side of the portfolio to the glidepath. The optimal approach is to adjust the duration of the fixed income portfolio as the target date approaches. Instead of attenuating the riskiness of the portfolio, they simply provide more fixed income investments in the naïve belief that a reduction of the Aggregate Bond Index will provide portfolio protection.”

They also noted that while the average expense ratio for all institutionally priced funds is at 72 bps, it is “still too high.”