PLANSPONSOR - October-November 2022 - 20

INVESTMENTS |COVER STORY
" We think about inflation risk quite a bit, because investors
are increasingly sensitive to inflation as they get older, " O'Toole
says of the Freedom Funds' managers. Fully retired people may
not have the ability to generate more income by working, so
inflation has a direct impact on their purchasing power. The
Freedom Funds have exposures to both TIPS [Treasury inflation-protected
securities] and commodities. Real assets such
as real estate or commodity funds can do well in inflationary
times because the underlying holdings have tangible value that
can rise with inflation, she says.
Most of the target-date fund managers Russell evaluates
have an allocation to real estate investment trusts, at least further
along the glide path, Bandow says. " Often, [inflation-sensitive]
allocations don't even become somewhat meaningful until a
target-date investor gets to retirement, " he says. " Prior to that,
the allocation is usually less than 10%. In retirement, the allocation
may be 10% to 30%. " Target-date fund managers generally
do not allocate heavily to inflation-sensitive investments prior
to that because their modeling shows that equities and fixed
income will likely perform better for investors with a long time
horizon, he adds.
" We think that, in the 15 years leading up to retirement and
in retirement, it's important to put direct inflation sensitivity in
the portfolio, and we do that through TIPS allocations, " Dessner
says of American Funds' TDFs. " If you're thinking about it over
the long term, equities have been a pretty good protection against
inflation. But, in a shorter time period, the relationship between
equities and inflation can break down. " -Judy Ward
When to Fade Equities
P
lan sponsors may want to take new research from the
Morningstar Center for Retirement & Policy Studies personally.
According to the study, many sponsors fail to
inspect their plans' target-date funds to verify their suitability-
likely depriving the participants of optimal retirement readiness.
Morningstar's July 2022 publication " Right on Target? " says
sponsors do not always consider participants' behaviors or needs
when selecting target-date glide paths.
The paper states that TDF glide paths-across diverse
sectors, employing individuals with widely varied jobs and
personal circumstances-are significantly similar, even with
considerable variation in these workers' average wages and the
percentage in each industry who have, or have not, retired by
age 65.
" We see many sponsors that are basically accepting the
dominant glide paths, regardless of pretty big differences in
their employee population compared with other plans, " says
Aron Szapiro, head of retirement studies and public policy at
Morningstar
and Morningstar
Investment Management
in
Washington, D.C. " The other big tell to me is that everybody has
moved to these 'through' glide paths, and we just see very little
association between the decision to elect to offer a glide path
that's supposed to run through retirement, and therefore takes
on more equity risk, and the actual propensity of plan participants
to stay in the employer plan. "
A target-date glide path directs participants' asset allocation
20 PLANSPONSOR.COM October - November 2022
Too few sponsors recognize the glide path/career path connection
based on the number of years until their target retirement date.
Because the glide path typically allocates the assets more conservatively
as a participant nears retirement age, it includes more
fixed-income assets and fewer equities as time goes by.
Despite variations in compensation, time in the workforce
and expected retirement date, with few exceptions, 55-year-olds
in DC plans' TDF glide paths have an equity exposure set at
66%, while, for 65-year-olds, with few outliers above or below, it
is set at 47%, the Morningstar paper says.
" There are definitely plan sponsors that are making adjustments
based on their plan population-and maybe a lot of
them-but there are also a lot that clearly aren't or you wouldn't
be seeing the kind of homogeneity or similarity of glide paths
across industries and across employers with very different characteristics, "
Szapiro, a co-author of the white paper, says.
Participants enrolled in an insufficiently personalized
TDF may sacrifice asset growth by de-risking to bonds earlier
than needed. Conversely, a non-personalized glide path for
a participant with outside assets, a defined benefit plan or
another source of retirement income can take on more equity
risk than may be advisable otherwise.
Jamie Bentley, executive vice president and national retirement
sales manager at PIMCO in Newport Beach, California,
says there is an emerging category of TDFs being referred to
as " personalized TDFs. " Current technology allows recordkeepers
to automatically consider additional data points beyond
http://www.PLANSPONSOR.COM
PLANSPONSOR - October-November 2022

Table of Contents for the Digital Edition of PLANSPONSOR - October-November 2022
