PLANADVISER - May/June 2018 - 44

investment-oriented
The Retirement Purse
I
n the early days of target-date funds (TDFs), 10 or 15 years
back, product designers for defined contribution (DC)
plans were, maybe fittingly, focused on the early days of
the retirement cycle-saving and investment during participants'
working lives-with little emphasis on the retirement
years themselves.
But TDF managers still held differing views on how to
fashion their funds' glide paths in the later stage, which led
the industry to develop a shorthand, placing TDFs into two
categories: those that invested " to " participants' retirement
dates, progressively moving to a more conservative and static
exposure to equities and other return-seeking assets, and
others that invested " through " retirement, approaching the
later years with a more aggressive posture and then gradually
reducing equity exposure during retirement.
As a practical matter, though, for such complex products,
" to " versus " through " is a distinction without much of
a difference. " Early on, it was an easy way to classify funds, "
notes Jeff Holt, an analyst of multi-asset funds at Morningstar
in Chicago. " But there are so many decisions to be made in
designing a portfolio and income distribution in retirement,
and 'to' versus 'through' is just the tip of the iceberg. "
Treating a participant's retirement as a watershed is, in
actuality, fair: When a person stops working, the value of his
Should a participant's TDF still seek returns after he crosses the finish line?
human capital-receiving a salary in exchange for work-
falls to zero. " You go from saving and investing-and being
cash flow positive into your retirement account-to a point
where you are cash flow negative, " observes David O'Meara,
senior investment consultant at Willis Towers Watson, in
New York City. " Because you're no longer able to make contributions,
your ability to bear risk changes meaningfully. "
How a target-date fund should react to that shift in risk
is where the " to " vs. " through " debate originates, but consultants
and fund managers say that the investment glide path
decision should be drawn from more factors: longevity risk,
or how long participants have to rely on their accumulated
assets; behavioral risk, or how well they choose their investments;
whether or not they will stay in their employer-sponsored
plan; and when they are likely to start drawing down
their retirement funds. A separate issue, but one that nonetheless
is calling for answers, is a means for systematically
distributing accumulated assets into retirement income
streams.
" All of us who build glide paths look at a mosaic, " says John
Croke, head of multi-asset product management at Vanguard
Group, in Valley Forge, Pennsylvania. " One important piece
everyone agrees on is the financial theory that there's a return
premium for investing in equities and that, for a retirement
44 | planadviser.com may-june 2018 Art by Claire Merchlinsky
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