How assets are allocated during pre-and-post retirement years can have a significant impact on investor outcomes.
By Will McGough on September 29, 2019
Why is glide path analysis important?
How assets are allocated during pre-and-post retirement years can have a significant impact on investor outcomes. Since the advent of Target Date Funds (TDFs), it has been universally accepted that the further an investor is from retirement, the more risk they should accept via higher equity exposure. And over time, as this horizon begins to sunset, their asset mix should turn more conservatively as demonstrated in the graph above. It is important to examine Glide Paths to understand the differences among them and then ultimately use their collective wisdom as the basis for selecting a Glide Path or customizing asset allocation.
Key Target Date Challenges to Consider
- Number of Series per Path
- Number of Vintages
- Frequency of Vintages
- Different Inception Date
- Retirement Date
- Equity Exposure at Landing Point
- Shape of Glide Path
- Is There an Income Fund?
- Path Strategy (Active/Passive) Asset
- Allocation Strategy
- Asset Class Definitions
- Target Allocation vs. Actual Allocation
Our Glide Path Investment Process
Identifying Glide Paths
Our Glide Path identifier classifies multiple TDF series which share the same Glide Path. Just as systematic risk accounts for the majority of stock returns, the Glide Path and its asset allocation drives TDFs. While it’s well known that asset managers create target date funds—constructed as a series and composed of multiple ‘vintages’ which reference the year participants anticipate retiring (i.e. 2020, 2030, 2040). What we’ve found to be missing from the industry* was a single source of information pertaining to the glide path, as many asset manager’s series share the same glide path. So, we set out to create what we believe is the industry’s first unique Glide Path identifier. Our identifier classifies multiple TDF series which share the same Glide Path and offers an efficient way to compare and analyze TDFs.
*We would love to compare notes with others that have embarked on such missions, please reach out
Filtering Glide Paths
Next, each quarter we screen and filter Glide Paths both Quantitatively and Qualitatively. We only want Glide Paths that share common characteristics of passive or active asset allocations. We exclude funds that build risk-focused Glide Paths, have a heavy use of alternatives, or don’t have readily available data. Quantitatively we only care about AUM, with our screen being $100 million+ in the Glide Path, which is the same screen the S&P Target Date Indices employ. A full list of Glide Paths is available upon request.
Glide Path Universe
The output is our quarterly time-based Glide Path Universe. The Universe can be used to:
• Set the acceptable bounds of asset allocation at any investors point in time to or from retirement
• Focus on the percent equity allocation as a risk level from conservative to aggressive, rather than To, Through, or Blend
• Be a research tool taking a high level, standardized look at the allocations to asset classes and the active/passive approach, thereby leveling the playing field of TDFs
One Size Doesn’t Fit All
We believe that no one Glide Path is perfect for all participants in a plan. This one-size-does-not-fit-all conundrum is amplified by the fact that Glide Path design varies greatly among TDF managers. By vetting the industry to build a suite of paths that cover it, we’re able to complement time with the addition of risk, delivered through percentage of equity, for participants. Stadion’s Managed Account Glide Paths are designed based on a proprietary methodology for deriving the Target Date industry consensus asset allocation.
Author: Will McGoughChief Investment Officer of Retirement Will McGough joined Stadion Money Management in 2003 and currently serves as Chief Investment Officer of Stadion’s Retirement investment strategies which comprises oversight of Stadion’s risk-based, target date, and managed account strategies. He is a member of the Investment Committee and Senior Management team, and serves as as Stadion’s Chief Investment Officer, Retirement. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Will received his BBA in Finance from the University of Georgia and also holds the Chartered Financial Analyst designation. Will is a member of the CFA Institute, the CFA Society of Atlanta, the American Association of Professional Technical Analysts, National Association of Active Investment Managers, the UGA Alumni Association and National Eagle Scout Association.
There is no guarantee of the future performance of any Stadion account. Material has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Results based on available universe of Target Date Fund Series, which includes registered mutual funds, and non-registered collective investment funds and insurance accounts. Collective investment funds and insurance accounts are only available for investment to qualified retirement plan assets such as 401(k) plans.
The commentary, analysis and opinions expressed are those of Stadion’s Investment Team. The commentary, analysis and opinions referenced are as of the date of publication and are subject to change without notice. This material is for informational purposes only and should not be considered investment advice. This is not a recommendation to buy or sell a particular security. The investment strategy or strategies discussed may not be suitable for all investors.
Investors must make their own decisions based on their specific investment objectives and financial circumstances. Stadion Money Management, LLC (“Stadion”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Stadion’s investment advisory services can be found in its Form ADV Part 2, which is available upon request.
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