PLANSPONSOR - January - February 2024 - 32

INVESTMENTS
Demographic Shifts
A
s more target-date fund investors
near the end of their glide
path, sources say, plan sponsors
are focusing more on retirement
income. Morningstar data suggest that
increasingly investors are opting to stay
in their target-date fund, even though
the target date has passed, while they
figure out how to manage the spending
phase of their retirement.
Sources say there has been a push
toward solutions such as annuities,
which offer lifetime income, but Mathieu
Pellerin of Dimensional Fund Advisors
points out that the so-called " annuity
puzzle " remains a persistent
issue. " I
think retirement income as an issue and
a desire is here to stay, " he says. " But we
are likely to see some product differentiation
within target-date funds over the
next five to 10 years as providers figure
out the best income solutions. "
Sources we spoke to agree that retirement
income will likely end up as a mix of
products and services. They note that the
drawdown phase of retirement is different
for each individual investor, and it can be
challenging to offer one-size-fits-all products.
As a result, it is more likely that sponsors
will provide access to several different
tools that investors may choose from.
" We're seeing increased interest
from plan sponsors in dynamic qualified
default investment alternative investments,
and more investment choices-but
adoption is still low, " says Kelly Campbell
of Capital Group. " It's an exciting chapter,
but there is a lot more to write. "
For instance, BlackRock's LifePath
TDF series offers access to annuity
products for investors in its LifePath
Paycheck funds. These funds include
the option of allocating to an annuity
over time. Investors may choose to put
all or a portion of their savings into select
32 PLANSPONSOR.COM January - February 2024
One income
solution offers
a sleeve in the
target-date fund
that is designed
to hedge
retirement
consumption.
annuities beginning at age 59.5.
Nick Nefouse, global head of retirement
solutions, and head of LifePath
multi-asset strategies and solutions, at
BlackRock in New York City, says, " We
would encourage plans to think about their
own plan demographics and how they're
going to start thinking about the shifts
we're seeing as more people enter retirement, "
he says. " It may be a good time to
look under the hood and see if your [TDF]
providers have plans in place for liabilities
as well as assets. "
For participants who choose to
remain in target-date funds or are interested
in solutions other than annuities,
some providers are turning to hedging
strategies that can support investors as
they strategically draw down their savings.
Sponsors seek a mix of TDF products to meet individuals' needs
Sarah O'Toole, Boston-based institutional
portfolio manager at Fidelity
Investments, notes that Fidelity has
recently launched a TDF strategy that
includes an allocation to alternatives.
The mandate includes an allocation to
real estate, and, over time, O'Toole says,
the investment team will expand that to
provide other illiquid and liquid alternative
investment strategies. The size of
the allocation is approximately 5% now
but could grow to as much as 10%.
" Sponsors recognize the value of
excess returns and diversification, " she
says. " We spend a lot of time with sponsors
to understand their plans' goals so we
can provide solutions to meet their needs. "
Dimensional has taken a similar
route. One income solution offers a sleeve
in the target-date fund that is designed to
hedge retirement consumption. If a participant
is planning to spend 25 years in
retirement, for example, the fund will offer
25 years of payments.
" It provides an income solution
without participants having to give up
control of their assets, " Pellerin says. " I
think over time we might see more interest
in a middle-ground solution like this. "
T. Rowe Price is also looking at
the middle ground. Andrew Jacobs van
Merlen, portfolio manager and co-portfolio
manager for the target-date strategies
in the multi-asset division at T. Rowe
Price in Baltimore, says his firm is considering
solutions that combine a drawdown
strategy and annuity offerings so people
can use what they have saved but still
manage longevity risk.
" There's no silver bullet when it
comes to decumulation, " van Merlen says.
" But
the industry recognizes this is the
next area where we'll see a lot of evolution
and exploration in terms of what's possible
and what the best tools are. " -BM
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PLANSPONSOR - January - February 2024

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