Does Your Target-Date Glide Path Suit Your Workforce?
Plan sponsors evaluating packaged and custom target-date solutions should take a close look at the demographics of their plan participants and how they stack up against those of a “typical” plan. It’s critical information when making a glide-path decision.
According to the Defined Contribution Institutional Investment Association (DCIIA), target-date assets exceeded $2 trillion at the end of 2017. Custom solutions were a healthy share—more than 20%.* Whether a plan sponsor chooses a custom or packaged target-date solution, fiduciary duties require that it best suit the participants who will rely on it the most. And the glide path is a key consideration, whether it’s choosing the right packaged glide path or opting for a fully customized version.
The Demographic Aspect: Who’s in Your Plan?
The attributes of the workforce play a key role in the decision. Packaged glide paths are designed for participant populations with typical wages, account balances, retirement ages and other characteristics. For many plans, this may be a suitable choice. But demographic and saving behaviors can differ quite a bit in some plans. Custom glide paths can be tailored to those profiles—and can adapt as those profiles evolve.
Here are a few of the plan-specific factors that affect glide path choice:
Retirement Age: Packaged target-date solutions generally assume 65 as the retirement age, but not every industry is the same. Companies with workers who tend to retire past the age of 65 (think of the agriculture, retail and education sectors) may need a glide path with more equity exposure in midlife than those with workers who tend to retire earlier (such as the healthcare, finance and information industries).
Glide paths should be designed to minimize catastrophic losses at and beyond retirement—regardless of age. Participants who are far from retirement want to maximize growth and diversify their assets without sacrificing returns. Those in the middle of their career need a combination of strong growth to compound savings, lower volatility and less risk that inflation will be a drag on purchasing power. Participants nearing and in retirement want to minimize sharp losses, combat inflation risk and balance downside protection with the need for growth to help their savings last.