FAAF: Glide Paths – Getting From Here to There

Panel members agreed it is important for plan sponsors to understand the rationale behind the glide path of lifecycle funds they are considering.

align=”center”> The Panel Audio File

Gary Terpening, SVP, Seligman Advisors Inc., said the goal of the funds should be to prudently build as much retirement income for participants as possible. The underlying glide path methodology could attempt to reach this goal by taking advantage of the different market cycles, or attempting to produce income during a down market.

Terpening suggested that the usual tools for analyzing funds should be supplemented with probability modeling using monte carlo analysis and real historical data.

Scott Wensel, Senior Portfolio Manager, Ibbotson Associates, added that it is important to look at plan and participant factors, such as whether participants are also in a defined benefit plan and the size of a 401(k) plan’s company match when considering which funds are best. Sponsors should also consider risk preference when analyzing a set of funds’ glide path. Wensel noted there is a wide range in asset allocations among lifecycle funds from different product providers.

He suggested that sponsors should look at the number and types of asset classes included in the underlying funds and look for diversification and the inclusion of real-return asset classes to offset inflation risk, such as TIPS or alternative investments.

Preservation of Principal

Joseph Nagengast, Principal, Target Date Analytics LLC, told attendees the primary objective of the funds should be to not lose principal, and that a focus on growth should be secondary to that. He also said gliding down too soon gives up returns unnecessarily, and when considering participant factors, while it is true that not all 40-year-olds are the same, they do have the same number of years to retirement.

Nagengast added lifecycle funds’ glide path should be a curve of steady risk, but should shed risk rapidly as participants approach retirement, because loss has a greater effect on those who have less time for market recovery or to make plan contributions.

One thing panel members disagreed on was the continuation of the glide path past retirement. While Terpening and Nagengast say the glide path should end at retirement, Wensel says the savings should last for a participant’s lifetime, so the glide path should continue to evolve throughout retirement. He points out this is also a way providers can keep investors, and keep them from going somewhere else after retirement.