PLANSPONSOR - March - April 2023 - 12

UPFRONT
Add Alts to Improve TDFs' Results
WHEN defined contribution plans avoid
investing in alternatives-viz., via targetdate
funds-they actually lower the participants'
account returns and retirement
income, new research has found.
Modest asset diversification in TDFs
can improve the saver's expected retirement
income by between 6% and 8%,
even when the cost of fees is factored in,
says the report " Can Asset Diversification
& Access to Private Markets Improve
Retirement Income Outcomes? " from
the Georgetown University Center for
Retirement Initiatives at the McCourt
School of Public Policy, along with WTW.
The 2022 research found that
greater savings accrued for future retirement
income when expanded TDFs were
used-those allowing greater diversification
by exposure to private markets, and
specifically to alternative investments-
vs. a so-called typical TDF, which is solely
composed of stocks and bonds.
The researchers
created retirement
TIDBITS
The Visible Difference
When a participant
starts saving for
retirement has
a big effect on
outcomes. Successful
retirement outcomes
usually depend on
beginning early,
saving at a high
enough rate, or
increasing that
rate over time and
saving persistently.
$2.5mm
$2mm
Age 25, 6% of salary, with a 1-percentagepoint
annual increase to 15%
Age 40, steady 15%-of-salary contribution
$1.5mm
$2,294,798
income projections by simulating the
working life of a participant in terms of
5,000 different paths. In each, the fullcareer
employee contributes to the retirement
plan, while other variables such
as salary growth, market returns and
inflation fluctuate. " At retirement, the
participant has 5,000 unique ending DC
balances, each of which is converted into
an annuity amount, " states the report.
Findings for the three types of TDFs
that the researchers considered are as
follows:
Stock/bond
only. Under
adverse
scenarios (5th percentile), the DC plan
may replace $24,400 or less per $100,000
of pre-retirement annual wages; in favorable
scenarios, (75th percentile), it may
replace $89,300 or more, with the expected
outcome (50th percentile) being $60,900.
Typical TDF. These comprise modest
amounts of real assets and private credit.
Under adverse scenarios ( 95th percentile),
the DC plan may replace $24,600 or less
per $100,000 of pre-retirement annual
wages; in favorable scenarios (25th percentile),
it may replace $90,300 or more, with
the expected outcome (50th percentile)
being $61,600;
Expanded TDF. This group had the
greatest allocations to alternatives.
Under adverse scenarios (95th
percentile), the DC plan may replace
$26,200 or less per $100,000 of preretirement
annual wages; in favorable
scenarios (25th percentile), it may replace
$98,000 or more, with the expected
outcome (50th percentile) being $66,700.
With the three target-date types,
researchers also extrapolated glide-path
scenarios of 40 years to retirement, 20
years to retirement, at retirement and in
retirement, according to the report.
" Ultimately, it is in these more
moderate-risk portfolios in the mid- to
retirement-dated funds where using alternatives
provides the greatest advantage
over the TDF, " the paper says. -Noah Zuss
$1,252,057
$1mm
$0.5mm
$0
25
30
Source: T. Rowe Price, " 2023 U.S. Retirement Market Outlook "
35
40
45
Age
50
55
60
65
12 PLANSPONSOR.COM March - April 2023
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