Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. Print
July 27, 2009 01:00 AM

Target-date glidepaths must change, Mercer says

Jeff Nash
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Defined contribution plan participants are burning through their retirement assets much faster than employers realize, which could have big implications for how much target-date funds invest in stocks, a consulting firm executive contends.

    In a soon-to-be released research paper, Terry Dennison, worldwide partner and Mercer LLC's U.S. director of consulting, said the average participant withdraws more than 20% of his or her account balance per year at or soon after retirement, leaving the participant tapped out after five years.

    The upshot: Glidepaths, which typically convert equity holdings to cash and bonds in target-date funds over a 15-year span, should cut the conversion period to five years so participants can better withstand stock-market volatility.

    Mercer's research comes at a time when members of Congress have lambasted target-date funds — especially those with short horizons for people nearing retirement — for having stock-heavy allocations. The Securities and Exchange Commission and the Department of Labor, which held a joint hearing in June on target-date funds, are expected to impose new disclosure and fiduciary requirements on the funds (Pensions & Investments, June 29).

    The problem, according to Mr. Dennison, is that typical participants in target-date funds attempt to maintain their previous lifestyles after retirement by drawing down their account balances more rapidly than is “actuarially sound” or that is considered in glidepath design.

    “It seems clear the trend in glidepath development (the assumption that the long-term return advantage of equity over cash will provide a sufficient increment of wealth to compensate for short-term volatility) ignores critical asset balance and behavioral factors and is thus misguided,“ Mr. Dennison wrote. “Participants typically deplete their accounts so rapidly that long-term advantages are meaningless.”

    Mr. Dennison cited data from J.P. Morgan Asset Management in his paper, showing target-date fund providers assume participants withdraw a consistent 4% to 5% annually during retirement. In reality, the average participant withdraws more than 20% per year, according to the J.P. Morgan data. Because of this high “burn rate,” participants are more sensitive to short-term volatility than once thought, Mr. Dennison wrote. As a result, this “unsustainable rate” of spending requires a shortening of the typical glidepath to little or no equity exposure by five years after retirement.

    “We're finding many participants are not willing to give up their previous lifestyles, so if they happen to catch a bad period in those five years — even if they're not completely wiped out — no rebound will create enough wealth to keep them in the game, “ Mr. Dennison, who is based in Los Angeles, said in an interview.

    Different goals

    Mr. Dennison also recommends there be a range of return/risk target-date funds to accommodate different participants' retirement goals. For example, he said, there could be low-, moderate- and high-risk funds for each target date. “This would add a second dimension to target-date funds,” he said.

    Adding risk-related funds would be particularly important for participants who have other retirement assets. “There's a huge difference between someone that also has a defined benefit plan and someone that doesn't,” Mr. Dennison said in the interview. “The participant with the DB plan can take on higher risk for a higher expected return.”

    Mr. Dennison said Old Mutual, Maxim Funds and ING Funds offer return/risk target-date funds, but wasn't aware of other major target-date providers offering these kinds of funds for retirement plans.

    Ronald Surz, a principal with researcher Target Date Analytics Inc. and president of consultancy PPCA Inc., both in San Clemente, Calif., agreed that shortening the glidepath is best for participants, but would go even further than Mr. Dennison.

    “Target-date funds that (maintain high equity exposures) through retirement are a mistake designed to benefit the fund companies at the expense of plan participants,” Mr. Surz said. “They've been sold to plan sponsors, who really should be more selective and at least consider target-date funds that end at the target date with no equities and require participants to act on their own.”

    But most experts interviewed took issue with Mr. Dennison's paper.

    Chris Lyon, a consultant at Rocaton Investment Advisors LLC, Norwalk, Conn., agreed plan sponsors should take participant behavior into account when selecting target-date funds, and said they largely do.

    “We haven't seen plan sponsors picking heavier equity-allocated products,” he said. “But we also don't think they should cater to the lowest-common denominator. No target-date fund is designed for people to spend all their assets in three years.”

    Tough to track

    Thomas Fontaine, head of AllianceBernstein Defined Contribution Investments, New York, questioned the high “burn rate” cited in the paper, noting that record keepers can track money flowing out of plans, but can't account for where the money goes.

    “Many participants could be rolling those withdrawals over into IRAs,” he said. Mr. Dennison acknowledged it is possible, “but probably uncommon,” that participants are rolling over a portion of their balances into individual retirement accounts. Participants tend to roll over their entire balances, he explained.

    Mr. Fontaine also disagreed that shortening the glidepath is the solution. “We've never thought that target-date funds are a replacement for responsibility,” he said. “They're a default option, but participants still control the money. We believe participants should seek the help of an adviser.”

    Josh Cohen, senior consultant based in Russell Investment Group's Chicago office, said his firm believes target-date funds should hit their most conservative asset allocation at retirement, and then remain static. “But asset allocation can only do so much,” he said. “If you're burning through your savings quickly, you can't asset allocate yourself out of the problem.”

    Adding a range of return/risk funds to accommodate for different participants' goals, as suggested by Mr. Dennison, would be a “step backward” for the industry, he added: “Participants have a lot of trouble determining their own risk tolerances.”

    Rod Bare, director of asset allocation strategies at Morningstar Inc., Chicago, said one solution is to annuitize a portion of the balance needed for essential expenses and put the rest in a target-date fund for discretionary expenses.

    “There are enough target-date funds with enough glidepaths to find the appropriate one to roll into at retirement,” he said.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize

    Reader Poll

    August 10, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Gaining Momentum: Where Next for Trend-Following?
    How Has 2022's Carnage Reshaped Global Stock and Bond Markets?
    Can Sustainable Labeling of Financial Products Prevent Greenwashing?
    Hedge Funds 2.0: Back to the future
    Is there a mid-cap gap in your DC plan?
    Why pursue direct lending in the core middle market?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    August 1, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit