Lipper to Rank Target-Date Retirement Funds

Lipper announced Tuesday that it has devised a method of rating target-date funds, which are hard to assess as a group since their asset allocations and glidepaths vary so widely and they themselves are structured as funds-of-funds, Reuters reports.

To address this challenge, Lipper has created peer groups of target-date funds with similar performance to compare on a quarterly basis. Lipper likens this to the Bradley-Terry model of comparing tennis players.

“Deciding which firm’s target-date funds to buy has been hard,” wrote Lipper’s head of research for the Americas, Andrew Clark, in a report. “Buying one of these products is certainly more complex than buying a single mutual fund.”

Among 30 target-date funds with a finale of 2030, Lipper ranked a fund from T. Rowe Price first, one from Principal Investors second and that of Fidelity Investments third.

In August, a company called 401(k) Advisors launched a scorecard for target-date funds, with 80% of the scoring based on such quantitative measures as performance and holdings, and 20% qualitative, based on such things as expenses and service. To tackle the issue of future shifting allocations inherent to these funds, the scorecard uses a standard deviation calculation meant to measure performance risk, rather than compare performance to industry sectors.

Funds with scores over seven are considered “favorable,” while those that earn a four or lower are tagged “poor.” Funds that earn a five or six, would be put on a watch list, and fiduciaries would be encouraged to monitor their performance and future scores.