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Target Date Fund Exposure: The Next 10 Years

It’s a bit hard to believe, but we just said goodbye to the 2010’s and entered a new decade. We can fondly look back at the past decade, though, while wondering what the next decade will bring.

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By Clayton Fresk on January 16, 2020



It’s a bit hard to believe, but we just said goodbye to the 2010’s and entered a new decade.  Not only does it not seem it’s been 20 years since the world was gripped by fears of Y2K but also that music we may remember well from that period is on the cusp of hitting its designation as “classic”—or “old school”, depending on your view. We can fondly look back at the past decade, though, while wondering what the next decade will bring.

 

Looking at the Target Date space, we’ve also seen a plethora of changes over the past decade.  It was a time during which numerous new issuers entered the market while others left. The investment methodology of these Target Date Funds (TDFs) also often changed, whether it be an issuer changing their glide path as the bear market receded further in the rearview mirror or the alteration of the underlying makeup of their investments.

 

While we can easily analyze what’s happened over the past 10 years, as we enter a new decade, we can use our existing knowledge to consider how things may change going forward.  While it’s impossible to predict how issuers will change their TDFs, if at all, one thing we can do is examine existing glide paths and think about how they may change – or rolldown – over the next 10 years.

 

For this analysis, we took the industry glide paths and measured equity exposure at each point—or years to/from retirement.  We then took the average exposure at each year, as well as the standard deviation of the exposures.  Finally, we segmented the glidepaths into 10-year increments (the x-axis on the following chart).  This was to see how an investor in a certain glide path could see the exposure change over the period, or the starting equity less the ending equity, which we’ll call Slope (the left-hand scale on the following chart).  Through this method of analysis, we can also measure how the industry agrees or disagrees on how much equity an investor should have at the various points/segments of the glide path based on the standard deviation of the exposure at each point (the right hand scale on the following chart).

 

Starting with the blue Slope line, we can see:

  • There is less change in equity exposure (Slope) for younger investors moving 10 years forward and for older investors moving 10 years forward
  • There is greater change in equity exposure for investors near retirement, with the highest degree of change occurring for investors from 13 to 3 years from retirement (noted with the blue dot on the chart), with the average exposure moving about 20% lower.

 

Then with the purple Standard Deviation line:

  • There is low standard deviation in the exposure for younger investors, meaning the industry generally agrees how much equity these investors should hold
  • There is high standard deviation for investors near retirement, meaning the industry disagrees how much equity these investors should hold, with the most dispersion for investors 8 years from retirement to 2 years past retirement (noted by the purple dot on the chart).
  • There is also a moderate amount of standard deviation for investors post-retirement, meaning there is also some disagreement in how much equity should be held in these income-producing strategies (which is another topic altogether!)

 

So, what if you’re a target date investor that is 10 years from retiring? While there may be disagreement in the industry on how much equity you should hold, individual retirement investors don’t necessarily have the option of choosing their exposure. Investors in plan-level TDFs are only able to invest in the option that was selected for their plan and the level of equity exposure at any given time is determined by the fund’s issuer.

 

For individuals, this amount may be way too high and, for others, too low. This difference is determined by the individual’s personal situation and preferences. In any case, a single Target Date Fund isn’t designed to accommodate the flexibility necessary to ensure each investors exposure is appropriate.

 

 

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Author: Clayton Fresk

Clayton Fresk joined Stadion Money Management in 2009 and currently serves as Portfolio Manager of Stadion’s Retirement investment strategies, which comprises oversight of Stadion’s managed account, target-date, and risk-based strategies. 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. Clayton holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Minnesota. He also received an MBA degree and a Bachelor's degree in Finance & Marketing from the University of Minnesota.

Glidepath ChangesTarget Date FundsTDFs
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Written By:

Clayton Fresk

Clayton Fresk joined Stadion Money Management in 2009 and currently serves as Portfolio Manager of Stadion’s Retirement investment strategies, which comprises oversight of Stadion’s managed account, target-date, and risk-based strategies. 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. Clayton holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Minnesota. He also received an MBA degree and a Bachelor's degree in Finance & Marketing from the University of Minnesota.


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.

 

The opinions expressed are those of the Stadion Money Management, LLC (“Stadion”) Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed. This is not a recommendation to buy or sell a particular security. This material is for informational use only and should not be considered investment advice.

 

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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