PLANSPONSOR - March - April 2023 - 28

30TH ANNIVERSARY | INVESTMENTS
ON THE GLIDE PATH
2023 marks the 30th anniversary of BlackRock's LifePath target-date funds.
PLANSPONSOR spoke with Nick Nefouse, global head of retirement solutions
in BlackRock's multi-asset strategies and solutions team and head of
LifePath, in New York City, about how TDFs have evolved over his career.
PLANSPONSOR: Over the past three decades, target-date funds have played
an increasingly large role in retirement plans. What drove that evolution?
Nick Nefouse: We got a number of features through the Pension Protection Act
of 2006 that are important, including automatic enrollment and automatic escalation.
And the big one was moving people away from short-term bond funds or
cash accounts and into growth-oriented vehicles, aided by these auto-features.
Target-date funds were the winners of that shift.
PS: How has the target-date-fund space continued to evolve since 2006,
especially as many participants are opting to stay in-plan longer?
Nefouse: The Pension Protection Act solved a savings gap problem primarily by
getting people into plans and into the right investment vehicles. What's happening
now is that you've got many people retiring, and they're trying to figure out the best
way to spend down what they have saved. So the industry is working on ways of
shifting what was a savings accumulation vehicle to a vehicle that can accommodate
both asset accumulation and decumulation. We've recently created a spending tool,
for example, that shows people how to spend from within their target-date funds. I
think we're going to see even more product innovation in this area over the coming
years because there's so much demand from plan participants.
PS: What does the ideal retirement vehicle look like 10 years from now?
Nefouse: I think there's a bigger conversation now concerning what are called
" total benefits. " As I mentioned, the PPA was designed to solve the savings
problem, but that is only one piece. I think what we've started to see with the
SECURE [Setting Every Community Up for Retirement Enhancement] Act-in
both versions one and two-is a bigger focus on helping participants manage
their total financial lives, including spending.
have persisted, regardless of the plan type, and may become
more acute as people live longer and may outlast their savings.
At the same time, pensions may be growing increasingly unable
to fulfill long-term liabilities, he says. " There is still work to do
to support the long-term needs of pension plans in addition to
what the retirement industry and plan sponsors are doing to
support DC plans. "
In 1995, when the Department of Labor issued Interpretive
Bulletin 95-1, allowing for pension risk transfers, the DB landscape
changed. Pension plans that maintained a positive
funded status could offload portions of their long-term liabilities
to insurers by annuitizing those liabilities.
Then, in 2001, the United Kingdom government issued
U.K. Accounting Standard FRS17, updating its accounting
guidance to allow for the creation of liability-driven investment
28 PLANSPONSOR.COM March - April 2023
strategies. LDI is designed to help plan
sponsors ensure that their assets and
liabilities match,
and derivative investments. This
through a mix of bond
investment
strategy is now available in the U.S.
and other jurisdictions as well.
Both of these strategies were designed
to support the viability of pensions
following a number of high-profile pension
plan failures.
Over the years, the markets for both
rapidly
pension risk
transfer
and LDI
expanded in value. In 2022, pension risk
transfer deals amounted to practically $50
billion, according to preliminary data from
insurance company Milliman.
The size of the global LDI market now
accounts for $3.5 trillion of assets, according
to market data from Capital Group. As both
markets grow, regulators are taking a fresh
look, and new rules could be on the horizon.
The Shrinking Investment Menu
First, there was the stable value fund,
then the mutual fund, then the balanced
mutual
fund,
followed by
the lifecycle
fund, then the sector fund. Each of these
was designed in an effort to find the right
mix of securities that would be able to
follow participants throughout their lives
as their risk tolerance changed, while
still providing for their retirement, says
Sue Walton, senior retirement strategist at
Capital Group in Chicago.
" I remember working with plan sponsors
in the late 1990s to early 2000s on
plans that had 20 or 30 funds on the menu-there was a focus
on having a big offering, " Walton says. " But very often we'd see
things like a 25-year-old fully invested in a stable value fund, or
a 65-year-old fully invested in an equities fund. These menus
weren't leading to the best outcomes for investors, and plan sponsors
started working on how to trim them down and give participants
better information so they could make better decisions. "
As investment menus began to slim down, Congress, in
2006, passed the Pension Protection Act, which created a safe
harbor for target-date funds through its qualified-default-investment-alternative
provision. This marked a significant shift in the
potential investment products available for use in defined contribution
plans.
" It's hard to overstate the impact of what we got with the
QDIA, " says David Thompson, vice president and investment
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