PLANADVISER - May/June 2018 - 46

investment-oriented
investor, it's the right place to take risk throughout the life
cycle. The second is the decline in human capital over time.
That's why glide paths are downward sloping. "
More meaningful, perhaps, than the nuance of whether
allocations are changing by a few percentage points are
the levels of those allocations. " At any point, the level of
risk is more important than whether it is flat or declining, "
O'Meara says. " A fund that holds 40% in
equities has a similar risk level to one
that starts at 50% and glides down to
30%. That's very different from a fund
that starts at 50% and stays there. "
At BlackRock in New York City, Matt
O'Hara, global head of investments for
the firm's LifePath target-date offering,
has rigorously modeled the question
and advocates for steady allocations
during retirement. " Put all of the uncertainties
together, and it gets you to a
constant allocation of return-seeking
assets such as equities, " he says. " That
will allow the highest spending at an
appropriate risk over a lifetime. Some
managers reduce their funds' equity
risk over time, but, in our framework,
that reduces the ability to spend.
" In our research, we don't see the
" to " versus " through " distinction alone
as an adequate way for choosing funds, so we don't emphasize
it, " says Holt. Morningstar took its last close look in
2016, and, he says, " One interesting point was that, with the
'through' funds, investors owned more in equities in the
earlier years and less later on. But for both 'to' and 'through'
funds, at 30 years after retirement, the average equity allocation
was roughly the same. "
He also points out that an overall " to " or " through "
measure of equity content just scratches the analytical
surface: " Sponsors also need to look at the asset subclasses,
because not all equity exposures are the same, and neither
are bond exposures. "
Another consideration for investment allocations is the
timing of withdrawals. Croke brings together his firm's
data on its own clients and government statistics, and finds
that most retirees postpone withdrawals. " We see assets
leaving DC plans and going to IRAs [individual retirement
accounts], but we don't see an increase in consumption from
that wealth until people are in their early 70s. In building a
glide path, because those assets are not being touched, we
continue to take prudent levels of equity exposure, to 30%
seven years out. "
" My view is that TDFs should invest through retirement, "
says Martha Tejera, head of consulting firm Tejera & Associates
in Seattle. " People rolling their accounts over to IRAs
are not going to be out of the market very long, and most of
them have to fund 25 or 30 years of spending, so why put
them in an overly conservative asset allocation at the point
of retirement? "
Implicit in the idea of a through TDF is an assumption
" Sponsors also
need to look
at the asset
subclasses,
that participants will keep their assets in employers' plans
once they retire. In turn, they will need some orderly way
of drawing them down. Distribution is still on the drawing
board, however, Holt says. " There have been attempts for
several years to insert retirement income and distribution
features into target-date funds, but the reality is they
haven't gotten widespread adoption. "
TIAA has built an annuity feature
into its custom TDFs for about 50 of
its clients. " The annuity is liquid to
meet QDIA [qualified default investment
alternative] requirements, and,
for a typical 2020 fund, about 30%
of assets would be in the annuity, "
reports
Timothy Walsh,
because not all
equity exposures
are the same,
and neither are
bond exposures. "
senior
managing director, in the firm's New
York City office. " Having income
security through an annuity allows
greater equity exposure in the rest of
the portfolio for a longer period, " he
explains.
T. Rowe Price Group, Baltimore, on
the other hand, has brought to market
a fund for retirement distribution,
paying out about 5% of assets annually.
So far, it is not part of a TDF structure,
but the firm is exploring a TDF version.
" Distribution in retirement is not an investment product
question, because TDFs are fully liquid, " says Tejera. " It's more
of an administrative question, making it easy for participants
to take periodic distributions. "
" We think there will be a need for a set of solutions for
distribution, " predicts Lorie Latham, senior DC strategist
at T. Rowe Price. " Participants are solving for a variety of
goals: longevity, secure income, structured paydowns or
bequests. These would add complexity for sponsors, but if
more retirees want to keep their assets in their plan, that
might be where we end up. "
" The DC system is behind on distribution, " O'Meara
concludes. " We need to find ways to engage with participants
as they approach retirement. DC sponsors are
missing an opportunity to play a critical role to provide
them with choices and help them sort out those crucial
decisions. " -John Keefe
KEY TAKEAWAYS
* Target-date funds' glide paths are much more complex
than a simple " to " vs. " through " would suggest.
* In evaluating TDF glide paths, advisers may consider
the fund's approach to longevity and behavioral risk
and potential to deliver retirement income.
* When assessing a TDF glide path, it is also imperative
to analyze the asset subclasses.
46 | planadviser.com may-june 2018
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