Target Date Funds' “yellow brick road” is their glide path. The glide path is, in essence, a pre-described mix of the TDFs asset allocation over time. Since the advent of TDFs, it has been universally accepted that the longer a participant's time horizon, the more risk they should accept via higher equity exposure.
By Will McGough on October 3, 2019
Target Date Funds’ “yellow brick road” is their glide path. The glide path is, in essence, a pre-described mix of the TDFs asset allocation over time. Since the advent of TDFs, it has been universally accepted that the longer a participant’s time horizon, 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 conservative.
Glide paths are displayed in a simple two dimensional X,Y chart. The x-axis, or horizontal alignment, represents Time Horizon. We’ll discuss various methods for representing time horizon in another post, but to keep it simple time horizon is the anticipated amount of time an investor has. In a TDF case this means the amount of time until an investor retires.
The y-axis, or vertical placement, ie the up or down component to the graph represents very HIGH level asset allocation. Things such as how much equity and fixed income exposure. Equities represents stock indexes, such as the S&P 500 or MSCI International Index. These indexes are comprised of stocks that are investible, like Apple and Samsung. Anything not invested in stocks is typically invested in fixed income, stuff like US Treasuries and debt of those same largest companies around the world.
Looking at our sample glide path, you can see at the top left, the path starts with roughly 90% equity and 10% fixed income. This is for an investor with a 40 year time horizon, so typically if you assume retiring at age 65, for a 25 year old.
As an investor inches closer to retirement, the TDF reduces exposure to equities and increases exposure to fixed income. Ultimately ending the path just under 40% for a current 75 year old investor who retired at age 65.
As you might notice, Glide Paths are based on time horizon with the asset manager behind the glide path determining what they believe to be the best allocation to equities and fixed income over time. Therefore, when a 401(k) plan offers just one Glide Path all investors get the same allocation per the target retirement date corresponding to a glide path year making them one-size-fits-all.
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.
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