All 2020 Target Date Funds reach their target year in 2020 but not all will take action. Why? Because every glide path is different.
By Will McGough on January 9, 2020
In our post “You cannot be Serie(ou)s!” we showed our approach to glide path analysis, ultimately ending up with 56 Glide Paths. Similarly, in “Target Date Fund Basics” we highlight the fact that all 2020 Target Date Funds reach their target year in 2020 but not all will take action.
Because every glide path is different.
One of the key concepts behind building a glide path is determining the terminal asset allocation, i.e. how the fund is allocated when it reaches its target year. Traditionally, this has centered around the idea of the fund having the lowest equity exposure of its entire span. This method is used to preserve the most capital during an investor’s retirement. This final-year apportionment is referred to as the fund’s “landing equity allocation” and can vary wildly, by our analysis, from 10% to 50% equity.
Adding to this confusion is the fact that the TDF industry has no consensus as to when a landing equity allocation should begin. Although, some glide paths reach this point at their target retirement year most carry on past retirement—some up to 30 years past.
The industry defines this as…
- To Retirement: Land at target date year
- Thru Retirement: Land past target date year
Chart Source: Stadion
The chart above depicts the criteria for an issuer determining when landing equity is engaged. All 56 glide paths are depicted but with names redacted. Also, in the interest of full disclosure, this analysis is based on our own work and any errors in accuracy are our own. Whereas most TDFs are transparent about their landing year and equity, there are several that had us digging pretty deeply for information, so our data arrives here highly curated.
The dilemma for any Financial Advisor or 401(k) Plan Sponsor is choosing just one of these as the default investment for a 401(k) plan. Whoever selects this singular pathway, be it advisor or sponsor, must have a deep understanding of both the demographics of the participants (who can only presumably benefit at large in this scenario by being a relatively homogenous group) and the characteristics of any glide path under consideration.
Both of these are necessary so as to match, as closely as possible, the retirement goals of the participants and the exposure of the glide path.
The landing equity allocation range of 10-50% equity can make a huge difference for retirees. A relatively routine and “vanilla” 20% bear market could wipe away anywhere from 2% to 10% of a retiree’s balance depending entirely on the TDF a plan offered.
Target Date Fund and Glide Path analysis appears very straightforward, until you get ready to land!
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.
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