Target date funds are understood as the “autopilot” solution by many because they are designed to take the guesswork out of asset allocation, automatically, over the course of a participant’s career. At BlackRock we believe that they are the best vehicle for the most people. But not all vehicles are built alike, or help guide you to the final destination most effectively. That’s what GPS is for.
And that’s why we’ve built LifePath around three core principles (an acronym aptly named GPS) to offer participants Growth, Protection and Stability.
Our strategy is designed to achieve those three goals for everyone along their path to retirement. It’s differentiated from other products on the market in several ways. Here’s how:
1. Growth when young
The LifePath design takes an overweight position in growth assets for younger individuals relative to many of our peers. This approach is grounded in our understanding of human capital, or the current value of future income. Human capital is greatest when individuals are young and can reasonably expect to continue earning paychecks for multiple decades. It that sense, the expectation around has bond-like characteristics. Given the stability afforded by human capital, we believe it’s important for younger individuals to maximize the equity risk premia in their financial portfolio when they have the most human capital to diversify market risk and short-term volatility.
This approach now extends to our fixed income allocation, as our research found that varying allocations within our US core bond exposure based on where an individual is in their lifecycle can have a positive impact on retirement outcomes. It allows us to provide more growth-seeking fixed income exposure when individuals are younger, and more stability and equity diversification in periods of market stress around retirement.
2. Protection around the point of retirement
On the flip side, downside protection is most critical as individuals approach retirement, at which time we On the flip side, our portfolios become more conservative than peers as individuals approach retirement. During this time, we focus on high-quality fixed income and a more conservative equity allocation. We believe the ability to preserve investment balances during periods of volatility for these individuals is another key differentiator of our LifePath index strategy relative to peers. We saw this play out in Q1 of 2020, during COVID-related market volatility, for example.
3. Stability in spending in retirement
In building our target date funds, our goal is to provide consistent spending in retirement – helping individuals maintain the standard of living they enjoyed during their working years in retirement. We believe that target date funds are appropriate vehicles to address both the accumulation and decumulation phases of retirement savers.
Other providers in the marketplace may onlNow, one concern that is top of mind among retirement investors right now is inflation, due to its ability to erode future spending power. With that in mind, we’re solving for the necessary amount of inflation protection to have in the portfolio in a much more methodical way based on where an individual is along their lifecycle.
There’s an opportunity cost for holding inflation-sensitive asset classes during non-inflationary periods Other providers may consider inflation hedging purely from an asset allocation perspective – whether they have exposure to inflation-sensitive vehicles in our portfolio and at what weight. Our approach takes into account the relationship between human capital and inflation as well. Younger investors, who have longer investment horizons and greater equity allocations, are less impacted by short-term spikes in inflation. Meanwhile, investors closer to retirement benefit from LifePath’s allocation to inflation-sensitive assets.
And that’s why we’ve built LifePath around three core principles (an acronym aptly named GPS) to offer participants Growth, Protection and Stability.
Setting the right destination
When choosing a target date fund, the decision ought to start with an evaluation of the investment objective. With that understanding you can more effectively determine the best solution for savers, one that will meet their needs across their entire retirement journey.
From there it’s about making sure the managers are thinking holistically from both an accumulation and decumulation standpoint. Because we believe both considerations should be reflected not only in the objective but also in the investment process and philosophy, and how those portfolios are then built.
Of course, risk management is also a critical piece. Other important questions would be, how are the managers overseeing and monitoring their strategies? How do they measure success?
Only after answering these types of questions can you determine if the target date fund under consideration has the right coordinates plugged into the GPS to guide savers to a better retirement. It’s a mindset advisors can adopt to help their clients make sound decisions and select the right investment product to reach their long term goals.
FOR FINANCIAL PROFESSIONAL USE ONLY
Past performance is no guarantee of future results.
Each fund is managed to a specific retirement year (target date) included in its name which designates the approximate year an investor plans to start withdrawing money. The allocation to asset classes in each fund balances every quarter and becomes more conservative over time as investors move closer to their target retirement date.
Investing involves risk, including possible loss of principal. Asset allocation models and diversification do not promise any level of performance or guarantee against loss of principal. Investment in the funds is subject to the risks of the underlying funds. The principal value of the funds is not guaranteed at any time, including at and after the target date.
The LifePath Funds may be offered as mutual funds. You should consider the investment objectives, risks, charges and expenses of each fund carefully before investing. The prospectuses and, if available, the summary prospectuses contain this and other information about the funds, and are available, along with information on other BlackRock funds, by calling 800-882-0052 or at www.blackrock.com . The prospectuses and, if available, the summary prospectuses should be read carefully before investing.
This material is provided for educational purposes only and should not be construed as research. The information presented is not a complete analysis of the global retirement landscape. The opinions expressed herein are subject to change at any time due to changes in the market, the economic or regulatory environment or for other reasons. The material does not constitute investment, legal, tax or other advice and is not to be relied on in making an investment or other decision.
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Stacey Torov is the Director, Head of Investment Strategy, Retirement Solutions at BlackRock.