Target-date funds keep evolving into a bulwark against panic trading by defined contribution plan participants, an opportunity for private market investing and a vehicle for guaranteed retirement income through annuities.
That was the general theme of a panel discussion, “Remodeling the DC Plan,” on March 10 at the Pensions & Investments' Defined Contribution East conference in Fort Lauderdale, Fla.
Surveys show that target-date investors in DC plans are basically buy and hold investors, said Brendan Curran, head of U.S. retirement at State Street Global Advisors. Even in dramatic stock market volatility, less than 1% of target-date investors trade, he said.
Curran said financial reality is requiring DC plan sponsors to reconsider investment lineup strategies, especially as the number of private investment companies and the number of publicly traded companies decrease.
“It is critical to consider the role of private markets,” said Curran, adding that any DC plan offering private market investments needs a diversified approach that includes equity, credit and real assets.
Interest rates play an important role in DC plan management, he said. Five years ago, they were basically at zero. Today, the 10-year yield is at 4.5%.
For plans that don’t allow participants to stay in the plan after retirement, it’s important that they ensure their default IRA is aligned with retirement savers’ best interests, Curran said, noting that money market accounts don’t always reset when rates go up.
Retirement income products also must be considered as traditional pension plan coverage declines.
Curran noted that research from Boston College shows that in 2025, less than 10% of heads of households who are turning 65 will be receiving a traditional pension.
Tim Pitney, head of lifetime income distribution at TIAA, said target-date investing benefits from increased customization to reflect the different demographics and needs of DC participants. Target-date funds also provide a greater opportunity for protecting participants’ income near retirement and at retirement via embedded annuities, he said.
