Data and Research

Tracking Risk in a TDF Glide Path

TDFs typically address risk by switching to fixed income as opposed to equity as a participant ages, but a closer look under the hood can reveal deeper insights to downside protection.

By Javier Simon | June 27, 2017
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Pulling assets out of a defined contribution (DC) plan during a severe market downturn is one of the worst actions a plan participant can take, says Jake Gilliam, senior multi-asset class portfolio strategist, Charles Schwab.

The firm recently released a white paper exploring how understanding behavioral finance among other factors can influence glide path design in target-date funds (TDFs), one of the most widely used default investments in the DC space.

Based on an analysis of its recordkeeping system as well as data from the Bureau of Labor Statistics and the Employee Benefit Research Institute (EBRI), Charles Schwab drew distinct investor profiles depicting how participants typically save at different age groups. For example, it found deferrals typically begin at 4% of salary per year for the youngest investors at around age 23 and steadily rise as salary, tenure, and age increase until a typical final deferral rate of 7% is reached.

Taking this and other data into consideration, the firm recommends plan sponsors selecting TDFs should thoroughly analyze their participants’ demographics and risk profiles to match them with the right TDF provider and glide path.

“Participants in general react very poorly to negative market events,” Gilliam explains. “They also are subject to performance chasing and overall inertia. Investors need to have a plan that helps them save for the long term and has the appropriate amount of risks, so they don’t abandon that plan at the absolute worst time.”

NEXT: Addressing down-side risk