TO vs. THROUGH
Josh cohen
DEFINED
CONTRIBUTION
PRACTICE LEADER,
RUSSELL INVESTMENTS
Q: Josh, you recently co-authored a
paper on this subject: what were the
key takeaways?
A: In the paper, Russell weighed in on the
big debate in the DC market place–what
is the optimal asset allocation strategy
for target date funds as a DC participant
approaches and subsequently enters
retirement? In that paper, we made two
key assertions:
1) A flat (static) post retirement glide
path is always optimal relative to a
downward-sloping one.
2) More conservative allocations are
appropriate at and during retirement,
particularly in the early years when a
participant is most vulnerable to a
market decline.
design, we believe a “To” glide path is
a better way to get participants
“Through” retirement.
RUSSELL
BELIEVES:
› A flat (static) post
retirement glide path is
always optimal relative to
a downward-sloping one.
›;More conservative
allocations are appropriate
at and during retirement,
particularly in the early
years when a participant
is most vulnerable to a
market decline.
Q: Why were you compelled to
write on this topic?
A: The industry has taken sides on how
to design glide paths at or near retirement.
The sides of the debate have been simplified
as “To vs. Through”. It’s a catchy phrase.
It rhymes, which is nice. But, we believe this
simplified categorization arbitrarily classifies
providers of target date funds based on
what the glide paths look like.
The trouble is, it implies that glide paths
like ours that don’t slope downwards after
retirement are somehow designed with
only the pre-retirement period in mind. That
mischaracterizes the debate. Indeed, it’s
a dangerous mischaracterization because
it encourages too much risk-taking at the
critical point of the whole program: the years
immediately before and after retirement.
When it comes to target date glide path
Q: What if you want to help
participants post retirement?
Don’t you need a “Through”
manager that actively manages
their allocation post-retirement?
A: It’s true many participants will stay in
the plan. A static allocation is not reflective
of a lack of thoughtful analysis. As we’ve
demonstrated in our last paper, for any given
downward-sloping glide path, we can find a
flat one that is better in terms of the trade
off between return (measured by expected
ending wealth) and risk (measured by the
probability and size of shortfall.) This is
reflected in Figure 1 where the dots below
the efficient frontier represent various sloping
glide paths. The chart shows the expected
results of the flat outcome is always superior
to sloping ones.
We find flat glide paths superior to sloping
ones post-retirement because participants
are at their greatest risk the day they retire.
Therefore, it is sub-optimal to be exposed to
the highest level of investment risk in their
post-retirement years on that same day.
So, just because we advocate a conservative
and flat glide path doesn’t mean we don’t
care about participants post retirement.
We would actually prefer to be called a
“through” manager.
Decumulation is different than accumulation
in a number of ways. There are many
variables and each particular participants’
situation may be quite different. A flat
and conservative glide path avoids over-engineering a solution for a group of
Graphic shown for illustrative
purposes to summarize the
analysis described. It is not
meant to represent an actual
investment. Forecasting
represents predictions of
market prices and/or volume
patterns utilizing varying
analytical data. It is not
representative of a projection
of the stock market, or of
any specific investment.
