Target-Date Glide Paths Are Not Personalized Across Industries

PLAN SPONSORS MAY WANT to take new research from the Morningstar Center for Retirement & Policy Studies personally, because according to the research, many are not inspecting the target-date funds provided to participants for personalization—likely leading to suboptimal retirement preparedness for workers.

Morningstar’s July 2022 publication “Right on Target?” says plan sponsors do not always consider participants’ behavior or needs when selecting target-date glide paths.

The paper states that TDF glide paths—across diverse sectors that employ varied workers with widely differing personal circumstances—are significantly similar, despite considerable variation in workers’ average wages and the percentage of workers in each industry that are working after age 65.

“We see a lot of sponsors who are basically accepting the dominant glide paths, regardless of pretty big differences in their employee population compared to other plans,” says Aron Szapiro, head of retirement studies and public policy at Morningstar and Morningstar Investment Management. “The other big tell to me is that everybody has moved to these ‘through’ glide paths, and we just see very little association between the decision to elect to offer a glide path that is supposed to run through retirement and therefore takes on more equity risk and the actual propensity of plan participants to stay in a plan.”

A target-date glide path aligns participants’ asset allocation based on the number of years until their target retirement date. Because the glide path creates an asset allocation that typically becomes more conservative as a participant gets closer to retirement age, it includes more fixed-income assets and fewer equities as time goes by.

Despite variations in compensation, time in the workforce and expected retirement date, with few exceptions, plan sponsors’ TDF glide paths’ average equity exposure at age 55 is set at 66%, while at age 65, with few outliers above or below, it is set at 47%, the Morningstar paper says. 

“There are definitely plan sponsors who are making adjustments based on their plan populations, and maybe a lot of them, but there are also a lot that clearly aren’t, or you wouldn’t be seeing the kind of homogeneity or similar-ness of glide paths across industries and across employers with very different characteristics,” Szapiro, a co-author of the white paper, says.

Participants enrolled in an insufficiently personalized TDF may sacrifice asset growth by turning to de-risk to bonds earlier than needed. Conversely, for a participant with outside assets, a defined benefit plan or another source of retirement income, a glide path that is not personalized can take on more equity risk than is comfortable.

The industry sectors that Morningstar studied ranged from finance and insurance, with average wages of $81,240; to information services, with average wages of $91,930; to accommodation and food services, with average wages of $30,850. Morningstar’s analysis also suggests that the percentage of workers who are working past age 65 varies by industry: 18.68% for workers employed in agriculture, forestry, fishing and hunting, which is greater than the comparable figure for mining (4.64%), utilities (4.64%), real estate rental and leasing (12.82%) and accommodation and food services (3.36%).  

Szapiro says that, for example, TDF glide paths for workers employed in an industry “where people typically work past age 65, you’d like to see that reflected” in the asset allocation.

“You might consider taking on more equity risk. There’s different ways that that can be reflected; regardless, that glide path should look different from the one that is serving people in an industry with higher salaries, a much lower Social Security replacement rate, where people tend to retire before age 65, and we don’t see that. We just see the same equity allocation,” he says.

Szapiro adds that for employers, “You want those risks to be calibrated, at least to some extent, to what your employee population is likely to need … unless for some reason you have so much money saved up you can fully defuse your risk with bonds, which I don’t think is going to be the case for most plan participants.”

Accounting for ‘Life’

While TDFs have been a good way to get employees enrolled in a defined contribution account and to begin to plan for retirement, older workers may need additional support to reach optimal retirement readiness.

Managed accounts are an investment product that can accommodate additional personalization for workers’ circumstances, says Mike Moran, senior pension strategist at Goldman Sachs Asset Management. A Goldman Sachs article, “Why Personalization and Goals-Based Solutions Matter,” makes a case for managed accounts as solutions that can lead to greater personalization and more optimal retirement outcomes.

“One of the issues that tends to impede retirement savings is, as we say in the paper, life. Life gets in the way: you have unexpected expenses, there are times you may be out of the workforce. So you’re not saving for retirement,” Moran says.

Caring for a loved one, saving for a child’s education and attending to other life events can throw workers off in their retirement savings. But Moran says that such challenges can be mitigated with a goals-based approach to retirement planning that includes a managed account.  

“If you are out of the workforce for a while, maybe your personal retirement plan has to take on more risk or you have to save more,” he says. “Maybe you’ve actually done well in your investments and maybe you actually can take less risk. So it’s really a way to say that as we think about the challenges that many individuals face for retirement, one of the big challenges is life gets in the way—and having a more personalized or goals-based approach can help overcome that.”

‘Managing’ Personalization 

The search for personalization may lead some plan sponsors “to more of a managed account type of product or solution for their participants—something that can personalize the experience and recalibrate the retirement needs as an individual goes along their financial journey,” Moran says. “You’re obviously also seeing a lot more , including financial wellness type programs within their benefit offerings, as a way to help their participants understand their retirement needs, and then, again, manage some of those financial issues that come up outside of retirement that sometimes impede the ability to save for retirement.”

One impediment to plan sponsors’ greater adoption of managed accounts could be that there are higher fees for them than for target-date funds. Excessive-fee claims are regularly the crux of plaintiff litigation over breach of fiduciary duty.

“The onus is on the industry to show that there’s value in adding something that’s a little bit more personalized in terms of what the plan lineup is going to offer,” Moran says.