Target-date funds
Guide
A clear view makes for
a better choice.
Consider the key differences among target-date funds
and what the implications are for plan participants.
Recent growth in target-date funds
has been dramatic
1
Projections also indicate
that target-date funds
will continue to grow in
significance, especially
for retirement plans with
nearly 80% of 401(k)
contributions by 2018. 2
| $1.5 trillion
in projected assets
as of 2018
| $706 billion
in assets as of 2014
| $71 billion
in assets as of 2005
Important details
Call 1-800-848-0920 to request a summary prospectus and/or a prospectus, or download prospectuses at
nationwide.com/mutualfunds. These prospectuses outline investment objectives, risks, fees, charges and
expenses, and other information that you should read and consider carefully before investing.
Asset allocation is the process of spreading assets across several different investment styles and asset classes. The
purpose is to potentially reduce long-term risk and capture potential profits across various asset classes.
About Nationwide Funds Group (NFG )
NFG comprises Nationwide Fund Advisors, Nationwide Fund Distributors LLC and Nationwide Fund Management
LLC. Together they provide advisory, distribution and administration services, respectively, to Nationwide Funds.
Nationwide Fund Advisors (NFA) is the investment adviser to Nationwide Funds.
Distributor
Nationwide funds distributed by Nationwide Fund Distributors LLC (NFD), member FINRA, King of Prussia, Pa.
NFD is not affiliated with any subadviser contracted by Nationwide Fund Advisors (NFA), with the exception of
Nationwide Asset Management, LLC (NWAM).
1
2
orningstar: 2015 Target Date Fund Landscape Report, Morningstar, Inc., April 2015.
M
Source: State of DCIO 2014, The Emerging Role of the Specialist Advisor, The Cerulli Report, Cerulli Associates.
• Not a deposit • Not FDIC or NCUSIF insured • Not guaranteed by the institution • Not insured by any federal government agency • May lose value
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Know the key considerations
when selecting target-date funds.
Because there are so many options and they’re not all built the same, it can be hard
to compare and select target-date funds efficiently. In 2013, the U.S. Department of
Labor (DOL) published guidance on its website (dol.gov) that can assist you and your
plan sponsors. Along with this guidance, we think we can help by highlighting other
key considerations you should note when making a choice.
What to look for inside
1
Compare their glide path strategies — to- vs. through-retirement — and the
level of equity exposure they offer along the way. Page 4
2
Know the number and type of asset classes they offer, and if they provide
exposure to nontraditional asset classes. Page 6
3
Evaluate the level of exposure to actively and passively managed funds, and
note how this relates to overall cost. Page 8
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3
Glide path strategies
Choosing the right glide path can make a big difference
in a participant’s retirement outcome.
To- vs. through-retirement
There are two types of glide path strategies. To-retirement strategies are designed for
participants who expect to withdraw most of their money at the target date. Allocations
typically remain set once they reach their target date. Through-retirement strategies are
designed for participants who plan to gradually withdraw from their accounts after the
target date. They continue adjusting the allocation up to 30 years after the target date.
Analyzing glide path strategies can be beneficial
The graph below illustrates the glide paths of three target-date providers and how very
different their strategies can be.3
Target date
100%
90%
Equity exposure
80%
70%
60%
50%
40%
30%
20%
10%
0%
2060
2055
2050
2045
Provider A (to strategy)
2040
2035
2030
2025
2020
Provider B (through strategy)
2015
+5
Years
+10
Years
+15
Years
+20
Years
Provider C (through strategy)
Retirement date
Key considerations:
• To-retirement strategies that set their allocations at the target date may
be too conservative and may not provide enough equity exposure for
participants who decide not to cash out of their accounts at retirement
• Through-retirement strategies that continually adjust their allocations can
help participants manage market, inflation and longevity risk throughout
their retirement years
3
4
S
ource of competitor glide path data: Morningstar, as of 03/31/16. This reflects the most recent data available,
and equity percentages include commodities.
Level of equity exposure
At the core of the glide path strategy debate is the level of equity exposure target-date fund
managers establish. It varies significantly among funds with the same target date —
­ as much
as 40% — so it’s important to review where it stands at different points along the glide path
for each target-date fund you consider offering.
Range of equity exposure among target-date funds
100%
Percent of equity exposure
90%
80%
70%
60%
50%
40% gap
Maximum
40%
Average
30%
Minimum
20%
10%
0%
2060
2055
2050
2045
2040
2035
2030
2025
2020
2015
2010
Target retirement year
Key considerations:
• 54% equity exposure in a 2015 fund — for participants in retirement — could be
too aggressive, especially if the glide path strategy doesn’t gradually reduce its
equity exposure throughout the retirement years.
• 59% equity exposure in a 2050 fund — for early savers — could be too
conservative, leaving participants at risk of falling short of their savings goals.
5
Asset class coverage
Understand how the target-date fund providers are
approaching asset allocation.
Number and type of asset classes
It’s critical that your review goes deeper than just the overall equity exposure and you look
closely at the number and type of asset classes that target-date fund providers include.
Key considerations:
• Check the underlying asset classes within the target-date fund family to
help you determine if that fund is appropriately diversified
• Optimizing the mix of asset classes can help reduce portfolio volatility
because certain asset classes perform better or worse depending
on economic conditions, market forces, political environments and
government policies
Exposure to nontraditional investments
Not all target-date funds offer participants exposure to nontraditional asset classes, which
is important to consider since including them may help reduce the portfolio’s volatility.
Key considerations:
• Exposure to certain nontraditional asset classes may reduce risk
• Investing in nontraditional asset classes within a target-date fund can
be significantly more efficient and cost-effective than investing in
them individually outside of a fund
• Participants investing directly in nontraditional asset classes could pay as
much as 1.19% on average for certain asset classes4
4
6
Source: Morningstar, as of 3/31/2016. This figure was generated by averaging the peer group averages
across various nontraditional asset classes, including Emerging Market stock, Global Real Estate,
Commodities, TIPS, U.S. High Yield, International Bonds and Emerging Market bonds.
7
Asset management types
Consider the types of asset management that target-date
fund providers are using and why they’re using them.
Active vs. passive fund management
Actively managed funds pick specific investments and strive to beat their benchmark
indexes, while passively managed funds simply mirror the investments in their benchmark
indexes but usually have lower expenses.
Key considerations:
• Each management style has its merits, and it’s important to evaluate the percentage of
actively and passively managed funds within a target-date fund
• Having exposure to passively managed funds is appealing because of their low cost and
specifically, in certain asset classes where actively managed funds have struggled to
beat their benchmarks (see chart on Page 9)
Expenses
Over the last several years, the trend for target-date funds has been toward lower expenses,
but expense ratios can vary widely which is why this is an important consideration.
Key considerations:
• Lower fund expenses help participants keep more of what they earn
• The industry average for expenses among target-date funds is 0.59%5
5
8
M
orningstar category averages for institutional share classes as of 3/31/2016
Percentage of actively managed funds that historically
underperformed/outperformed their benchmark indexes
Five-year period ended December 31, 20156
Large-cap Stocks
84%
Mid-cap Stocks
Small-cap Stocks
16%
77%
23%
90%
Global Stocks
10%
79%
Emerging markets Stocks
21%
70%
30%
Intermediate-term Bonds
42%
High-yield Bonds
79%
21%
Global Bonds
Emerging markets Bonds
51%
49%
94%
6%
Short-term Bonds
36%
64%
80
60
40
20
Underperformers
6
70%
30%
TIPS
100
58%
0
20
40
60
80
Outperformers
S
tandard and Poor’s Indices Versus Active Funds Scorecard, December 2015. This is the latest version of this
report. Individuals cannot invest directly in an index. Performance shown represents past performance and
does not guarantee future results.
9
Remember these key points when comparing target-date funds
1
Understand their glide path strategies — to- vs. through-retirement — and
the level of equity exposure they offer along the way.
2
Know the number and type of asset classes they offer, and if they provide
exposure to nontraditional asset classes.
3
Evaluate the level of exposure to actively and passively managed funds,
and note how this relates to overall cost
For more help comparing your target-date fund options,
call your Nationwide® wholesaler at 1-866-789-3004 or
visit nationwidefunds.com.
10
FOR PLAN SPONSOR USE ONLY
Ç
Use the enclosed
materials to help
plan sponsors
compare target-date
funds and make an
informed decision.
11
Nationwide, the Nationwide N and Eagle and Nationwide is on your side are service marks of Nationwide Mutual Insurance
Company. © 2016 Nationwide
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