FAAF/EC – End Points

At PLANSPONSOR’s Future of Asset Allocated Funds (FAAF) Conference East, panelists Richard Whitney, Joe Nagengast, Kamila Kowalke, and Mark Friebel provided their own definitions of a “target date” and gave an in-depth look at various glide paths and their underlying strategies.

The Target

Richard Whitney, Director of Asset Allocation and Portfolio Manager at T. Rowe Price, defines target-date funds as a lifetime investment solution. The so-called “target-date,” he claims, marks the time at which a typical participant turns sixty-five, stops working, and stops accumulating assets. The distribution phase begins sometime after this; some participants might choose to withdraw their assets immediately, while others might prefer to wait for some time. Whitney noted that successful outcomes for individuals will deliver strategies that are likely to be adhered to over time and have good investment programs behind them. He stressed the importance of using a vehicle with a solid investment design responsibly when trying to generate good outcomes for participants.

Joe Nagengast, Principal at Target Date Analytics LLC, agreed, stating that the target-date marks a key point when the glide path ends and the accumulated funds should be shifted into asset-preservation or income mode. The target date should have something to do with the construction of the glide path, he said, and should not be ignored. Unfortunately, he pointed out, the transition from the accumulation phase to an adequate retirement income plan is not being handled consistently by existing providers.

Kamila Kowalke, Director of Institutional Markets at Dow Jones Indexes, reaffirmed the importance of the actual target date. As the end of the accumulation phase, she said, that date should marker the point of minimum risk for the plan, where inflation risk and real income and real purchasing power become absolutely critical. However, because (most) participants do not withdraw all of their funds in a lump sum on the day of retirement, she said, although the date does mark an ending, the plan should be designed in such a way to allow participants to stay there for a few years.

Nagengast noted that the current legal responsibility for a plan sponsor ends when a defined contribution participant takes his or her money out of the plan, but said he did not recommend that anyone abandon their participants at the target date. While a participant group might be relatively homogenous when first investing in a target-date fund, by the time that group is approaching retirement there will be a much greater variety of interests. The aggregation tool that was used for the glide path during the accumulation phase breaks down completely at the target date, and with so many options facing participants at that point it is impossible to predict what all of them will do. Right now plan sponsors are not held accountable for what happens to their participants after the target date, he said, but they are up to that point.

Although a plan sponsor's liability should end at the target date, Whitney reminded the audience that the problems of investment do not go away when an individual retires. The participant still has wealth that needs to be invested and managed over the course of his lifetime. He suggested that one alternative to a lifetime management or lifetime investment program would be a kind of annuitization strategy. Although he admitted it would be unrealistic to assume that all individuals would automatically make that decision, he contended that it is the most straightforward alternative post-target-date.

It is definitely important for plan sponsors to be aware of what possibilities and options already exist, what the ranges are, and how recent market developments might influence glide path construction going forward, said Kowalke." A huge range and variety of funds is already available, and looking at the different glide paths we can see that their beginning points are all fairly similar," she noted.

While historically assets were held in what one might consider "traditional" glide paths - those that have stocks, bonds, and cash - she claimed that over the past few years we have seen an evolution, and even the managers that has three asset class solutions have been looking at their funds from a different perspective.

- Sara Kelly