DISTINGUISHING “TO” AND “THROUGH”

WITH TARGET DATE STYLE INDICES

Executive Summary

 We have extended our consensus glide path target date indices to July 2012
create style benchmarks for “To” and “Through” target date funds
(TDFs). 401(k) and other defined contribution plans can use these
style indices to help screen, select, and monitor TDFs. The To index
generally has greater sensitivity to market risk, whereas the Through Contributors:
index is more sensitive to longevity risk. Peter Tsui
Director
 A two-factor model measuring de-risking policy and equity exposure Index Research & Design
approaching retirement provides a robust framework for distinguishing peter_tsui@spdji.com
To and Through target date styles.
Frank Luo
 Since asset allocation is the most important driver of investment Vice President
success, target date style is likely to have significantly more impact over Index Research & Design
time than equity style. frank_luo@spdji.com

 In back-tested performance, drawdown during the 2008 financial crisis Phil Murphy, CFA
for the 2010 S&P Through Target Date Index would have been -31.5%, Vice President
while for the 2010 S&P To Target Date Index it would have been Defined Contribution Channel
-22.0%. However, in the three years ended May 31, 2012, the 2010 philip_murphy@spdji.com
S&P Through Target Date Index outperformed the 2010 S&P To Target
Date Index by an average compound rate of 1.93% per year.

 Volatility between the two styles is very different, with the gap peaking
during times of market stress (see Exhibit 3).

 Consistent with our main target date index, the new style benchmarks
are driven by our annual TDF holdings survey. They are representative
of the To and Through styles and are appropriate benchmarks for target
date structures of any type, including mutual funds, collective trusts,
and custom strategies.

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Introduction
In order to match investment solutions with investment needs, many 401(k) plan sponsors seek to
understand key demographics of their participant base. Factors such as average compensation, age,
tenure, the presence of a defined benefit plan, and behavioral tendencies may inform the process of
selecting a Qualified Default Investment Alternative (QDIA) as well as other investments. How can plan
sponsors put these findings to their best use when selecting and monitoring TDFs?

A big part of the answer is to determine proactively whether a TDF’s asset allocation and glide path are
consistent with a plan’s particular needs. Target date style benchmarks can help throughout the process
— from screening candidates to monitoring performance and asset allocation. In this paper, we will
explain how we distinguish To and Through fund families and how our target date style indices are
constructed.

Our approach to target date style leverages the same empirically driven framework that we use to
construct our main target date index. Each year, we conduct a TDF holdings survey that is used to
determine benchmark asset allocations for each target year. Therefore, each target date index
represents the collective asset class exposures of surveyed managers. Our index is not constructed from
a prescriptive model but is a function of market observations.

To home in on To and Through TDFs, we refocus the notion of investment style from a micro to a macro
view. Rather than dealing with micro equity market factors such as price-to-book or earnings growth, we
deal with macro asset allocation factors. Given the primacy of asset allocation in the investment process,
target date style is likely to have significantly more impact over time than equity style. Implicit in the To
style is heightened sensitivity to market risk, which is defined as the risk of a decline in account value.
The Through style is more sensitive to longevity risk, which is defined as the risk of outliving one’s capital.
The risk-sensitivity distinction forms the basis of TD style classification (see Exhibit 1). We use this
distinction to construct a transparent framework for differentiating between To and Through fund families,
and to create a full suite of indices that use subsets of our annual TDF holdings survey to track each style
in a representative, consensus-driven approach.

Exhibit 1: The Trade-Off of Market Risk and Longevity Risk in TDF Styles

To TDFs Through TDFs

Greater Greater
longevity risk market risk

Less market Less longevity

risk risk

Source: S&P Dow Jones Indices. Diagram is provided for illustrative purposes.

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A Target Date Style Framework

TDFs seek to optimize total future cash flows available to plan participants using a manager’s
expectations of market risk and return, as well as his or her assumptions of participant behavior,
demographics, and longevity risk. Among these complex variables, market risk and longevity risk are the
two major factors to be balanced. Managers strike a balance between market and longevity risks by
controlling a number of important investment decisions. Crucial among them are two elements of their
glide path: the de-risking policy and the level of equity exposure near retirement and beyond. There is
significant variation among TDFs of the same maturity in both de-risking policy (as succinctly depicted by
the shape of a glide path) and in equity weights at retirement and beyond (as depicted by the absolute
level of equity holdings). We utilize these two observable glide path elements to classify each TDF glide
path (some providers have more than one) within our annual target date holdings survey into one of three
groups: To, Through, or a neutral group without dominant To or Through characteristics. We then follow
our Target Date index methodology to create a To Target Date Index and a Through Target Date Index.

Approach
Overview
Retirement plan stakeholders currently think of To and Through in an ad hoc fashion, which makes it
difficult to compare various TDFs consistently. Our framework classifies TDF style quantitatively, using a
two-factor model that reflects the two main risk factors of a TDF. This model creates a unique TDF style
score, a measure that reflects how each TDF manager balances the trade-off between market risk and
longevity risk.

Data and Fund Equivalents

The starting point for creating To and Through indices is the segregation of our annual target date
holdings survey universe. When assessing target style, we work at the glide path level on five-year
increments. Some fund families have more than one glide path, so we treat each separately to account
for any differences in asset allocation. To determine whether each glide path belongs in the To, Through,
or neutral group, we gather four data points for each:

1. Total equity weight (%) of the retirement income fund

2. Total equity weight (%) of the TDF whose maturity has most recently past
3. Total equity weight (%) of the TDF whose maturity is most nearly approaching
4. Total equity weight (%) of the TDF whose maturity follows the one in (3) above

Many fund families currently offer TDFs at five-year increments, but the data set has some gaps because:

 Historically, some families only offered TDFs at 10-year increments

 Not all fund families offer a retirement income fund
 Glide paths that stop de-risking near retirement may not have a TDF with a maturity that has just
passed

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To deal with differences between funds, we create fund equivalents, which are hypothetical equity
allocations used for filling gaps in the data needed, as outlined above. There are four fund equivalents:

 Retirement Income Fund Equivalent (RFE)

 Past Fund Equivalent (PFE)
 Approaching Fund Equivalent (AFE)
 Next-Approaching Fund Equivalent (NAFE)

See Appendix 2 for details of how we assign values to each fund equivalent.

A Two-Factor Model for TDF Glide Paths

Fund equivalents are the only input data to our style classification model. We use them to derive two
factors that are proxies for the equity exposure and de-risking policies of a TDF manager.

The current year is the reference year (RY). We determine all fund equivalents in five-year increments
and specify which fund equivalent is closest to the reference year. For instance, if the reference year is
2012, the closest fund equivalent is the PFE (2010). If the reference year is 2013, the closest fund
equivalent would be the AFE (2015).

We use two factors to model and classify each target date glide path:

1. Equity Exposure Factor: the average of the fund equivalent closest to the reference year (either
PFE or AFE) and the RFE
2. De-Risking Factor: the difference between the fund equivalent closest to the reference year
(either PFE or AFE) and the RFE

Style Score
We compute the equity exposure and de-risking factors and transform each value into a percentile of the
relevant data set (using Microsoft Excel’s™ PERCENTRANK function). We then add the transformed
factors to create a composite called the Style Score. Glide paths are ranked based on the Style Score.

If two or more glide paths have identical Style Scores, we use the transformed Equity Exposure Factor to
break the tie. The one-third of glide paths with the lowest Style Scores are assigned to the To category,
and the one-third of glide paths with the highest Style Scores are assigned to the Through category. Each
category has a minimum of 10 glide paths. The remaining one-third of glide paths, which are in the
middle, become part of the neutral group.

Following the same approach as the existing S&P Target Date Index, we survey fund holdings within
each of the style groups and determine the consensus glide path accordingly for the two styles.

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To and Through Performance

We back-tested performance of the To and Through style indices for the five years ended May 2012,
which shows a marked difference in the gross returns of near-dated To and Through indices during the
financial crisis and subsequent market turnaround (see Exhibit 2).

Exhibit 2 – Comparing the Gross Returns of To versus Through Indices

2010 Style Indices

30%

20% 16.91%
11.07%
12.04% 9.78%
10% 2.31%
1.44% 2.54% 2.51% 1.93%
0.46%
0%

-10%
-12.85%
-20%
-19.20%
-30%
2007 (June - Dec) 2008 2009 2010 2011 2012 YTD (Through
May)
To Through

2015 Style Indices

30%
19.22%
20% 15.08% 12.06%
10.98%
10% 2.32%
0.59% 1.38% 1.29% 1.83%
0%
-0.26%
-10%

-20% -17.78%
-23.36%
-30%
2007 (June - Dec) 2008 2009 2010 2011 2012 YTD (Through
May)

To Through
Source: S&P Dow Jones Indices. Returns calculated as of May 31, 2012. Results may change over time depending on when they
are calculated. These charts are provided for illustrative purposes. Past performance is no guarantee of future results. This chart
may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of the document for more
information regarding the inherent limitations associated with back-tested performance.

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The back-tested performance also showed differing levels of volatility between the style indices, with gaps
that peaked during periods of market stress (see Exhibit 3)

Exhibit 3: – Comparing the Rolling 90-Day Volatility of To versus Through Indices

2010 Target Date Style Indices
40%

35%

30%

25%

20%

15%

10%

5%

0%
Feb-08

Feb-09

Feb-10

Feb-11

Feb-12
Oct-07
Dec-07

Jun-08
Aug-08
Oct-08
Dec-08

Jun-09
Aug-09
Oct-09
Dec-09

Jun-10
Aug-10
Oct-10
Dec-10

Jun-11
Aug-11
Oct-11
Dec-11
Apr-08

Apr-09

Apr-10

Apr-11

Apr-12
2010 To 2010 Through

2015 Target Date Style Indices

40%

35%

30%

25%

20%

15%

10%

5%

0%
Feb-08

Feb-09

Feb-10

Feb-11

Feb-12
Oct-07
Dec-07

Jun-08
Aug-08
Oct-08
Dec-08

Jun-09
Aug-09
Oct-09
Dec-09

Jun-10
Aug-10
Oct-10
Dec-10

Jun-11
Aug-11
Oct-11
Dec-11
Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

2015 To 2015 Through

Source: S&P Dow Jones Indices. Volatility calculated as of May 31, 2012. Results may change over time depending on whey are
calculated. These charts are provided for illustrative purposes. Past performance is no guarantee of future results. This chart may
reflect hypothetical historical performance. Please see the Performance Disclosure at the end of the document for more information
regarding the inherent limitations associated with back-tested performance.

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During the financial crisis, drawdowns were worse for near-dated Through indices than they were for To
Indices, which aligns with the Through indices’ trade-off of higher market risk for lower longevity risk (see
Exhibit 4).

Exhibit 4 – Comparing Drawdowns of To versus Through Indices

Worst Drawdown, June 2007 - May 2012

-35.49%
2020
-42.75%

-29.25%
2015
-37.32%

-21.97%
2010
-31.49%

-45% -40% -35% -30% -25% -20% -15% -10% -5% 0%

To Indices Through Indices
Source: S&P Dow Jones Indices. Drawdown calculated as of May 31, 2012. Results may change over time depending on when
they are calculated. These charts are provided for illustrative purposes. Past performance is no guarantee of future results. This
chart may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of the document for more
information regarding the inherent limitations associated with back-tested performance.

Three- and five-year compound annual growth rates (CAGRs) show the dramatic effects of market
movements) during the sample periods (see Exhibit 5). The three-year window does not include the 2008
financial crises, while the five-year window does. As expected, near-dated maturities in the To style
underperformed those in the Through style over the three-year period and outperformed in the five-year
period.

Exhibit 5 – Comparing CAGRs of To versus Through Indices

5-Year CAGR
2.59%

3-Year CAGR
3.0%
11.55%

11.85%
11.44%

11.54%
11.37%

2.03%
11.28%
11.16%

11.16%

2.5%
10.87%

10.74%
10.60%

1.74%
10.24%
10.16%

12.0% 2.0%
9.63%

1.14%
8.96%

0.95%

10.0% 1.5%
8.23%

1.0%
0.20%

0.18%

8.0%
0.5%
6.0% 0.0%
-0.5%
-0.27%

4.0%
-0.52%

-1.0%
-0.65%

-1.04%

2.0% -1.5%
-1.07%

-1.27%
-1.50%

-1.60%

-2.0%
-1.77%

0.0%
2010 2015 2020 2025 2030 2035 2040 2045 2010 2015 2020 2025 2030 2035 2040 2045
To Indices Through Indices To Indices Through Indices
Source: S&P Dow Jones Indices. CAGR calculated as of May 31, 2012. Results may change over time depending on when they
are calculated. These charts are provided for illustrative purposes. Past performance is no guarantee of future results. This chart
may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of the document for more
information regarding the inherent limitations associated with back-tested performance.

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Exhibit 6: Performance of To and Through Style Indices

To Indices 2010 2015 2020 2025 2030 2035 2040 2045 2050
YTD return 1.93% 1.83% 1.83% 1.84% 1.86% 1.89% 1.96% 2.05% 2.16%

1-yr return 0.13% -1.63% -3.05% -4.29% -5.35% -6.33% -6.96% -7.42% -7.80%
1-yr volatility 9.26% 12.08% 14.62% 16.90% 18.91% 20.78% 22.14% 23.23% 24.16%

3-yr CAGR 8.23% 8.96% 9.63% 10.24% 10.74% 11.16% 11.54% 11.85% na
3-yr volatility 7.61% 9.97% 12.08% 14.01% 15.69% 17.22% 18.41% 19.40% na

5-yr CAGR 2.59% 1.74% 0.95% 0.18% -0.52% -1.07% -1.50% -1.77% na
5-yr volatility 9.58% 12.61% 15.48% 18.28% 20.72% 22.84% 24.55% 25.81% na
Through
2010 2015 2020 2025 2030 2035 2040 2045 2050
Indices
YTD return 2.31% 2.32% 2.31% 2.29% 2.25% 2.26% 2.23% 2.20% 2.15%

1-yr return -0.57% -2.27% -3.72% -4.93% -5.98% -6.58% -7.00% -7.33% -7.22%
1-yr volatility 11.93% 14.95% 17.56% 19.73% 21.56% 22.74% 23.41% 23.90% 23.47%

3-yr CAGR 10.16% 10.60% 10.87% 11.16% 11.37% 11.44% 11.55% 11.28% na
3-yr volatility 10.84% 13.10% 15.00% 16.62% 18.00% 18.82% 19.38% 19.53% na

5-yr CAGR 2.03% 1.14% 0.20% -0.27% -0.65% -1.04% -1.27% -1.60% na
5-yr volatility 13.73% 16.58% 19.36% 21.15% 22.65% 23.79% 24.64% 24.99% na
Source: S&P Dow Jones Indices. Returns, Volatility and CAGRs are calculated as of May 31, 2012. Results may change over time
depending on when they are calculated. This table is provided for illustrative purposes. Past performance is no guarantee of future
results. This table may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of the
document for more information regarding the inherent limitations associated with back-tested performance.

Conclusion
Target date style benchmarks, To and Through indices, can help defined contribution plan fiduciaries and
consultants select and monitor appropriate TDFs. For example, with the perspective gained from
understanding their participant base, sponsors can align the overall needs of their plan with a set of TDF
candidates. If their analysis calls for heightened sensitivity to market risk, they could start the selection
process by screening for TDFs which pursue a To style, as indicated by consistency with a To benchmark
index. Conversely, if demographic and plan design factors point to more concern about longevity risk,
they could start the selection process by screening for TDFs which pursue a Through style, as indicated
by consistency with a Through benchmark index. If neither style is strongly indicated, they could look at a
set of TDFs that provide a blend of To and Through (i.e., those that do not fall strictly into one style or the
other).

In the monitoring phase, target date style indices can be used as appropriate benchmarks for
performance analysis and attribution. They are also a source for comparing asset allocation and glide
paths between the style benchmark and any particular TDF. This approach holds some advantages to
peer group analysis because genuine TDF style benchmarks are representative, investable, style-
specific, and, most importantly, known in advance.

As with all statistical exercises, the degree of uncertainty inherent in measuring participant demographics
should be acknowledged. TDFs, including custom target date strategies, may be ideally aligned with the
overall needs of a particular plan. However, because individual participants retain all investment risk in
defined contribution plans, even a prudently selected TDF will not necessarily be optimal for all plan

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participants. Selecting a TDF for a particular plan is similar to fitting a line or curve to a set of data points,
and there will always be outliers within the participant population. It is not feasible to fit a glide path for
every individual plan participant, so sponsors should think about the opportunity cost of choosing a
custom TD strategy. If plan demographics and behavioral tendencies justify paying for the creation of a
custom strategy, it’s appropriate to measure that strategy’s opportunity cost relative to an off-the-shelf
TDF. A consensus target date style index is the most representative benchmark for such an opportunity
cost analysis. Consensus TDF benchmarks measure the combined opinion of active TDF managers as to
what asset class exposure is appropriate for each target date. They are representative, market-driven
proxies for each target date that stakeholders can use to measure the success of any given target date
strategy.

Plan sponsors can provide appropriate TDF benchmarks, financial education, and clear communications
to support proper usage of TDFs, even for outlier employees. They can also provide an illustration of how
their plan’s glide path compares to that of a consensus target date style benchmark.

S&P Dow Jones Indices Index Research & Design Contact Information
Global Head
Frank Luo +1 212-438-5057 frank_luo@spdji.com

New York
Berlinda Liu +1 212-438-7834 berlinda_liu@spdji.com
Aye Soe +1 212-438-1677 aye_soe@spdji.com
Peter Tsui +1 212-438-1493 peter_tsui@spdji.com

Beijing
Liyu Zeng +86 10-6569-2947 liyu_zeng@spdji.com

Hong Kong
Priscilla Luk +852 2532-8050 priscilla_luk@spdji.com

London
Xiaowei Kang +020 7176-8443 xiaowei_kang@spdji.com
Daniel Ung +44 (0) 207 176 8340 daniel_ung@spdji.com

Sydney
Simon Karaban + 61 2 9255 9847 simon_karaban@spdji.com

About S&P Dow Jones Indices Research & Design

S&P Dow Jones Indices is one of the world’s leading index providers, maintaining a wide variety of investable
and benchmark indices to meet a wide array of investor needs. Our research team is dedicated to conducting
unbiased and in-depth analysis on a broad range of topics and issues facing investors in today’s marketplace.
Research by S&P Dow Jones Indices’ Index Research & Design provokes discussion on investment matters
related to benchmarking in the asset management, derivatives and structured products communities. The
series covers all asset classes and is often used to float new indexing concepts or explain substantive
changes to well-known S&P Dow Jones indices.

For more articles on a broad range of index-related topics or to sign up to receive periodic updates, visit us at
www.spindices.com.

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Appendix 1: TDFs Surveyed in 2012

John Hancock Retirement Portfolio
PIMCO Real Retirement
Putnam Retirement Ready
MFS Lifetime
Harbor Target Retirement
Nationwide Destination
Wells Fargo Advantage
Russell Lifepoints
American Independence Nest Egg
USAA Target Retirement
Maxim Lifetime I
JP Morgan SmartRetirement
Manning & Napier Target
Columbia Retirement Plus
Schwab Managed Retirement
Source: S&P Dow Jones Indices. Classification based on S&P Dow Jones calculations of Style Scores, as of April 30, 2012, using
data from Morningstar, Bloomberg, and SEC filings.
ING Solutions Mainstay Retirement
Franklin Templeton Retirement
Vanguard Target Retire
Target
ING Index Solution Principal LifeTime
Schwab Target MassMutual RetireSmart
BlackRock Lifepath American Funds Inc. Target Date
Maxim Lifetime II Oppenheimer Transition
American Century LIVESTRONG TIAA-CREF Lifecycle Index
BlackRock Lifepath Index TIAA-CREF Lifecycle
Maxim Secure Vanguard Target Retirement
Fidelity Freedom Index Vantage Point Milestone
Alliance Bernstein Retirement
DWS LifeCompass
Strategy
Guidestone Funds MyDestination Maxim Lifetime III
Fidelity Freedom T Rowe Price Retirement
Fidelity Advisor Freedom Hartford Target Retirement
John Hancock Lifecycle Callan GlidePath

Appendix 2: Assigning Values to Fund Equivalents

Assigning values to fund equivalents follows logically from observed data:

1. Retirement Income Fund Equivalent (RFE) If a fund family has a retirement income fund, use its
observed equity weight (%). If a fund family does not have a retirement income fund, assign the
equity weight (%) of its static allocation as described in its prospectus. By “static allocation,” we mean
its current policy of final equity weight within its glide path. It can be thought of as the glide path
“landing point.”
2. Past Fund Equivalent (PFE) If a fund family has a past fund, use its observed equity weight (%). If a
fund family does not have a past fund and its stops de-risking at retirement, the PFE equals the RFE.
If a fund family does not have a past fund and it continues to de-risk beyond retirement, assign an
interpolated equity weight (%) that is the average of its RFE and the next available TDF equity weight
(%).
3. Approaching Fund Equivalent (AFE) If a fund family has an approaching fund, use its observed
equity weight (%). If a fund family does not have an approaching fund and its stops de-risking at
retirement, the AFE equals the PFE. If a fund family does not have an approaching fund and
continues to de-risk beyond retirement, assign an interpolated equity weight (%) that is the average of
its PFE and its Next-Approaching Fund Equivalent.
4. Next-Approaching Fund Equivalent (NAFE) Currently, all fund families offer a next-approaching
fund, and we use observed equity weights (%). If needed, interpolation could be used as in (2) and
(3) above.

Introducing a new way to explore indices

www.spindices.com

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PERFORMANCE DISCLOSURE
The inception date of the S&P Target Date Style Indices (“the Index”) was June 11, 2012, at the market close. All
information presented prior to the index inception date is back-tested. Back-tested performance is not actual
performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect
when the index was officially launched. Complete index methodology details are available at www.spindices.com.

Past performance of the Index is not an indication of future results. Prospective application of the methodology used
to construct the Index may not result in performance commensurate with the back-test returns shown. The back-test
period does not necessarily correspond to the entire available history of the Index. Please refer to the methodology
paper for the Index, available at www.spdji.com or www.spindices.com for more details about the index, including the
manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all
index calculations. It is not possible to invest directly in an Index.

Another limitation of back-tested hypothetical information is that generally the back-tested calculation is prepared with
the benefit of hindsight. Back-tested data reflect the application of the index methodology and selection of index
constituents in hindsight. No hypothetical record can completely account for the impact of financial risk in actual
trading. For example, there are numerous factors related to the equities (or fixed income, or commodities) markets in
general which cannot be, and have not been accounted for in the preparation of the index information set forth, all of
which can affect actual performance.

The Index returns shown do not represent the results of actual trading of investible assets/securities. S&P Dow
Jones Indices LLC maintains the Index and calculates the Index levels and performance shown or discussed, but
does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor may
pay to purchase the securities underlying the Index or investment funds that are intended to track the performance of
the Index. The imposition of these fees and charges would cause actual and back-tested performance of the
securities/fund to be lower than the Index performance shown. As a simple example, if an index returned 10% on a
US $100,000 investment for a 12-month period (or US$ 10,000) and an actual asset-based fee of 1.5% was imposed
at the end of the period on the investment plus accrued interest (or US$ 1,650), the net return would be 8.35% (or
US$ 8,350) for the year. Over 3 years, an annual 1.5% fee taken at year end with an assumed 10% return per year
would result in a cumulative gross return of 33.10%, a total fee of US$ 5,375, and a cumulative net return of 27.2%
(or US$ 27,200).

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DISCLAIMER
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Past performance of an index is not a guarantee of future results.

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