A report by Peter Thomann, owner of Thomann Tax & Asset Management Inc., claimed target-date funds used by the plan have too much exposure to equity after the target date has been reached. In a letter to PLANSPONSOR, Georgette Gestely, director, Tax Favored & Citywide Program, said the plan’s Pre-Arranged Portfolios' glidepaths have been customized to take the characteristics of the plan's average participant into consideration.
Plan participants are free to create their own asset mix if their circumstances differ from the general population, or for any other reason, including the advice of their financial planner. The funds are intended for use only by those participants who do not wish to customize their own asset allocation.
“On average, the plan's participants differ from many other employee populations that invest in target-date funds in two important ways,” Gestely explained. First, nearly all participants have a combination of a defined benefit plan and a deferred compensation plan. The defined benefit plan typically provides between 50% and 70% of final earnings for a retiree's lifetime, thus providing a fixed benefit for life. Effectively the defined benefit, as well as the lifetime annuity participants receive under Social Security, are insulated from the risk of the equity market. The availability of defined benefit payments, coupled with the earlier retirement age of many participants, supports the slightly higher equity allocation of the Pre-Arranged Portfolios, compared to some 'off-the-shelf' target year fund families.”
Gestely added that it is common in the industry for the glidepath to continue, after the target date, for periods ranging from five to 30 years, and fund officials believe this is appropriate given the relatively longer post-retirement investment time horizon of many participants.