Target date retirement funds are considered by many to be a suitable vehicle for steering employees into a comfortable retirement.

But as assets in these so-called autopilot investments, which adjust investors' allocations as they approach retirement, continue to soar, so does the responsibility of the plan's sponsor to choose the appropriate one for its employees, experts say.

Target date fund assets reached $706 billion at the end of 2014, an 8% increase from 2013, according to a 2015 Morningstar Inc. report.

And according to data from a recent Towers Watson & Co. survey, 95% of 401(k) plans offer target date funds, with 86% using them as the qualified default investment alternative; plan participants who do not select an investment are automatically put into the fund by the employer.

With so much money flowing into target date funds, and many plan participants being defaulted or auto-enrolled into them, plan sponsors must choose funds wisely and ensure that their plan participants “are as well informed as they can be,” said David O'Meara, New York-based senior investment consultant at Towers Watson.

Though there are many considerations when choosing a target date fund, those at the top of the list include: fees, passive versus actively managed approaches, asset allocation and “glide path,” or how allocations shift as retirement nears.

Evaluating fees

The Palo Alto Medical Foundation began offering target date funds in its 401(k) in 2008 so participants who didn't know how to invest their savings would have someone else to do it “at the lowest possible price,” said Dr. Robert Master, chairman of the retirement planning committee of the San Francisco-area nonprofit health care organization.

“Right away they have auto-asset allocation, they have auto-diversification (and) it's automatically rebalanced,” Dr. Master said.

That hands-off approach allows younger doctors in his medical group to “focus on saving and not investing,” he said.

After working with a financial adviser, establishing an evaluation process and comparing providers in terms of fees, glide path, performance and other differentiators, Dr. Master said low fees made the “most compelling case.”

So Palo Alto Medical Foundation chose The Vanguard Group Inc.'s target retirement commingled trusts, which invest in the same way as Vanguard's target date funds, but cost less. While the target date mutual funds are subject to specific regulations, including federal securities laws, commingled trusts are not. Instead, they are subject to anti-fraud provisions, banking laws, Department of Labor regulations, the Internal Revenue Code and the Employee Retirement Income Security Act of 1974, according to a Vanguard spokeswoman.

Now, 60% of the medical group's 1,476 retirement plan participants invest in the Vanguard offering, Dr. Master said.

Fees are a major consideration because “the higher the fees, the higher the hurdle the (fund) manager has to get over” to achieve a return, said Susan Powers, Westlake, Texas-based senior vice president of investment consulting at Fidelity Investments.

Active vs. passive approach

Fees also often are key when employers choose between actively managed or passive target date funds, which are typically less expensive, Ms. Powers said.

In recent years, passive target date funds, which try to match an index, such as the Standard & Poor's 500, have largely outperformed active managers, “but that trend tends to come and go over time, and what tends to drive it is dispersion of returns in the marketplace,” Ms. Powers said.

Active decisions are made with every target date fund, such as selecting the glide path and asset allocation. After those decisions are made, active and passive target date funds differ according to the strategies of the managers of the underlying funds: Active managers attempt to outperform a benchmark, while managers of passive funds allocate to index funds within asset classes.

In recent years, plan sponsors have been leaning toward passive strategies, favoring their simplicity and lower costs. According to Morningstar, assets in index-based funds grew 9.8% in 2014, compared with 7% asset growth of actively managed funds.

Jeff Tyler, Des Moines, Iowa-based portfolio manager at the Principal Financial Group, which manages active and “hybrid” target date funds — a mix of active and passive asset classes — said “active managers have difficulty performing relative to indexes when things are going well.”

However, in a sideways market with “a lot of volatility,” an active manager can “play defense” to control risk, whereas a passive fund cannot, Mr. Tyler said.

Trey Almond, who oversees Alpharetta, Georgia-based fuel transportation company Colonial Pipeline Co.'s investments as treasurer, said the availability of an index-based target date fund was the priority when choosing a provider.

“The data are pretty clear that

passive investment strategies tend to outperform the actively managed strategies,” he said, adding that actively managed funds often have multiple managers, making it difficult to keep

up with and alter if one is performing poorly.

At Colonial Pipeline, 95% of its 800 employees are enrolled in its 401(k) retirement plan, with half invested in Vanguard target date funds — a figure boosted by the fact that Colonial Pipeline uses the fund as its default plan.

Before offering target date funds, Colonial Pipeline defaulted new hires to a stable value fund, but it found employees weren't likely to change their initial investment. Target date funds instead offered a diversified investment option that, if employees never made an investment decision, wouldn't be “a bad solution for them in the long-run,” Mr. Almond said.

Mr. Almond's experience echoes an industry trend.

“Participants tend to stick with what they have,” said Kevin Jestice, Valley Forge, Pennsylvania-based principal and head of Vanguard Institutional Investor Services, part of Vanguard. “People don't make changes to wherever they are in relation to the 401(k) very often.”

Asset allocation and glide path

That's where a target date fund's asset allocation — its mixture of stocks, bonds and cash — excels, Mr. Jestice said.

Before target date funds, many investors in defined contribution plans were defaulted into money market funds, but they produced anemic returns. Target date funds did better with their prudent asset allocation based on a person's age, Mr. Jestice said.

The yield for money market funds, which invest in short-term securities, such as U.S. Treasury bills, averaged a total of 1.3% over the last 10 years, according to mutual fund data company Lipper Inc. That compares with the average target date fund return of a total 5% in the last decade, according to Morningstar.

Still, it's important to remember that target date fund investors can lose money.

Plan sponsors should look for asset allocations that that will maximize returns over a lifetime, rather than attempting to minimize losses in the short-term, he said. That means allocating “a healthy dose of stocks throughout the savings trajectory,” Mr. Jestice said.

A typical target date fund shifts its asset allocation from a majority of equities at the start of a career to a majority of bonds near retirement. This glide path, splits into two camps: “to funds,” which become most conservative at retirement, and “through funds,” which invest beyond retirement.

Palo Alto Medical Foundation's Dr. Master said a “through fund” makes more sense for his employees.

“If you're 65 and you have a significant other, there's a 50% chance that one of you will live to be 90,” he said. “Your money has to last for 25 years.”

But, argues the Principal Financial Group's Mr. Tyler, of more importance is determining how much risk a fund is taking on in and near retirement, as funds differ vastly in their volatility.

Engaging and educating

The Home Depot Inc. began offering target date funds five years ago as part of a strategy to meet employees “where they are as it relates to their investment knowledge and comfort,” said Brant Suddath, Home Depot's Atlanta-based director of benefits.

“So we offer core funds for those who are comfortable making investments within the core lineup, and we offer target date funds for those who aren't as comfortable.”

Evaluating a target date fund is not unlike the process for any other fund, he said. But unlike some who tout the target date funds as a “set it and forget it” option, Home Depot requires its plan participants to engage in the process.

Part of Mr. Suddath's responsibility “is ongoing education about all the options that are available within the plan” and communicating “the differences between target date funds, core funds, brokerage windows and financial engines,” he said.

But employees need to partake, “whether it's determining how much they contribute or where they invest,” he said.

At Home Depot, 39% of 401(k) plan participants invest in BlackRock Inc. target date funds, and Mr. Suddath said he believes offering the funds has been successful.

“There's a need for solutions such as this,” he said, adding that the target date funds offer diversification, whereas individuals might “be invested in one of two funds in a core lineup” if left to their own devices.