PLANSPONSOR - February/March 2021 - 12

UPFRONT
Multiple Ways to Glide to the Finish
UNDERSTANDING how a target-date
fund (TDF)'s glide path works-how the
proportion of equities to fixed-incometype
investments shifts as investors age-
is necessary in order for defined contribution
(DC) plan sponsors to fulfill their
fiduciary role in selecting funds and
monitoring plan investments.
Investment portfolio glide paths are
designed to be gradual, says John Doyle,
senior retirement strategist at Capital
Group/American Funds. Young workers
just starting to save for retirement can
tolerate a relatively high level of risk and
can invest aggressively. Therefore, their
holdings are predominantly equities.
But the portfolio will grow increasingly
conservative, inclining to fixed-income
investments, as the person ages, Doyle
says. " The participant's investment glide
path matures to match his needs. Some
TDF glide paths will continue even after
an individual retires. "
Randy Welch, managing director and
portfolio manager at Principal, notes that
investing in a TDF automates the management
of investments for participants, who
then do not need to be concerned with
when to rebalance, shift and de-risk their
portfolio. He observes, " It's a very easy
and efficient way to get individuals to the
proper asset allocation based on their age
and time to retirement. "
In general, Welch says, young investors
should start with a portfolio of 93%
equities and 7% fixed income. Whereas
the amount of equities grows smaller over
time, a percentage should be maintained
for portfolio growth, based on the investor's
retirement age, he says.
There is a common misconception
in how a glide path changes, Doyle points
out. TDF managers do not just reverse the
percentage of stocks to bonds; they strategically
manage each investment over
time. This will mean different equities for
someone age 60 than when he was 25. " It's
a real change in the types of stocks working
in the portfolio, " Doyle says.
The same can be said about bonds in
a TDF portfolio. The role of bonds changes
along the participant's glide path, as will
the type and amount of bonds the person
holds, Doyle says. Rather than leaning on
general stock-to-bond ratios, he says, the
sponsors should calculate a risk profile
for each investor.
Welch agrees, noting that the appropriate
level of equities will depend on the
investor. At Principal, young investors
begin with 91% to 93% of equity exposure
in the glide path. By the time they reach
12 PLANSPONSOR.COM February - March 2021 Art by Chiara Brazzale
retirement age, that percentage is 44% to
45%; when they have been retired for 15
years, this drops to between 23% and 24%.
The categories of equities and fixed
income are somewhat fluid, however,
and the types of investments in each
may vary, according to the manager. For
example, some might use real assets as
equities, Doyle says.
Real assets could include commodities,
public infrastructure and TIPS
[Treasury inflation-protected securities],
which provide a cushion to the portfolio
should there be a shock in the markets,
Welch says.
On the fixed-income side, high-yield
bonds may be used. These have a greater
expected return but more volatility than
government bonds, Welch says. Investors
experience that volatility as the companies
that are invested in are sub-investmentgrade;
the investor may earn excess return
but at additional risk, Welch says.
" We give investors in TDFs exposure
to many asset classes to help benefit them
no matter where they are in the glide
path, " he continues. " Most individual
investors would not gravitate to or have
an allocation to high-yield or emerging
markets, so the TDF helps them do that. "
-Amanda Umpierrez
http://www.PLANSPONSOR.COM
PLANSPONSOR - February/March 2021

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