Investing October 26, 2016

Modeling TDFs With Income in Mind May Benefit Retirees

Adding a range of high-income generating assets to a traditional retirement-stage TDF portfolio could boost income returns by nearly 40%, an analysis finds.
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Adding a range of high income-generating investments could significantly boost income returns for retirement-stage target-date funds (TDFs), a study suggests.

The research from Wilshire Funds Management, sponsored by the National Association of Real Estate Investment Trusts (NAREIT) was based on portfolio optimizations using 40 years of investment return data through 2015. It found that adding a range of high income-generating assets to a traditional retirement-stage TDF portfolio could boost income returns by nearly 40%, while providing comparable total returns and no increase in risk.

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Wilshire’s research is based on a variation of the mean-variance optimization (MVO) method for portfolio modelling. While traditional MVO models are designed to determine optimum levels of various portfolio assets that will produce a maximum total return for a specified level of risk, Wilshire’s income-oriented mean-variance optimization (IOMVO) model also incorporates a requirement for a specified level of income return.

Wilshire found that a traditional MVO-modeled portfolio that delivered a 2.37% annual income return and a 5.37% annual total return with an 8% level of portfolio risk could be enhanced with IOMVO modelling to deliver a greater annual income return of 3.25% and a comparable 5.27% annual total return with the same 8% level of risk.

NEXT: Change in asset allocations

Comparing the asset allocations between the traditional and income-oriented portfolios:

  • Equity allocations were reduced from 35% of the MVO portfolio to between 3% and 15% of the IOMVO portfolio;
  • High-yield bonds and preferred stocks became key parts of the IOMVO portfolio. The allocation to these assets increased from 9% to between 22.7% and 25%;
  • Non-U.S. developed market stock allocations rose from 4% of the MVO portfolio to between 9% and 23.5% of the IOMVO portfolio; and
  • REIT allocations rose from zero in the MVO portfolio to approximately 8% of the IOMVO portfolio.

“Depending on the income needs of the investor, portfolios that generate less income may require retirees to dig deeper and more frequently into their savings to fund their expenses, potentially resulting in the depletion of their assets while they are still living,” says Wilshire Funds Management Chief Investment Officer Joshua Emanuel. “Income-oriented portfolios with significant allocations to assets like REITs, high-yield bonds, preferred stocks and non-U.S. developed stocks may help investors meet the challenge of producing retirement income with less reliance on their savings,”

To learn more about the Wilshire study, “Income-Oriented Retirement Portfolios: Challenges and Solutions, 2016” and download the full report, visit https://www.reit.com/reitsandretirement.

Products October 25, 2016

Partnership Integrates Equity Compensation and Retirement Plan Management

Clients of Global Shares' new equity compensation management platform will now be able to work with Fidelity to provide participant servicing and brokerage solutions.
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Global Shares, a provider of stock plan administration recordkeeping services, software-as-a-service (SaaS) and financial reporting tools, has teamed up with Fidelity Investments multinational financial services corporation.

Clients of Global Shares’ new equity compensation management platform will now be able to work with Fidelity to provide participant servicing and brokerage solutions. This agreement will help transform the participant experience and extend the opportunity for integration with retirement plan services to more companies.

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Fidelity Investments and Global Shares will start engaging with prospects and clients immediately, to begin taking plans live in the spring of 2017.

“Company stock plans are becoming an increasingly popular employee benefit, and many clients are looking for ways to seamlessly integrate their stock plan administration with the management of their retirement plan and other benefits on the company’s platform,” says Kevin Barry, executive vice president, Stock Plan Services at Fidelity Investments. “We’re pleased to be teaming with Global Shares and look forward to leveraging their technology, platform and industry expertise to deliver an outstanding experience to our global clients.”

Equity compensation plans can be a vital part of employees’ long-term financial planning, including retirement planning.

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