The Retirement Research Center (RRC) at DCIIA released the third iteration of its Custom Target Date Fund Study, finding that the number of plans and strategies using custom TDFs, and the assets invested in them are increasing period-over-period.
According to the research, these period-over-period changes in asset allocation were primarily driven by reallocation due to glide path progression, rather than tactical or strategic policy changes.
RRC lists several changes within the asset classes surrounding equities, fixed income, inflation-sensitive assets, and diversifiers (asset classes such as bank loans, private equity, and hedge funds that offer diversification benefits), all of which are potentially driving the growth. The following changes were reported by the RRC:
- Equities:
- Allocation to foreign equities is moving away from standalone non-U.S. developed and emerging markets equities and is increasingly being consolidated into a single portfolio of global ex-U.S. equities.
- Similarly, small- and mid-cap allocations are being combined into a single SMID allocation.
- Fixed Income:
- Increasing allocations to stable value, and away from money market portfolios.
- Greater diversification of fixed income allocations to include multi-asset credit, unconstrained bond, and global core (unhedged).
- Inflation-sensitive assets:
- 96% of plans now use at least one inflation-sensitive asset class within their portfolios.
- Increasing use of real estate (public/U.S. REITs) and real estate (private/direct) and decreasing use of global REITs.
- Diversifiers:
- Average allocation still small, 1% (median 0%). Continues to slowly increase. Larger plans have a relatively higher allocation across vintages.
- 15% of plans utilize at least one diversifier, most employ just one product.
RRC consolidated the asset classes into the four categories listed, finding that the majority of asset class exposure is allocated to equities and fixed income, with a relatively modest but increasing allocation to inflation-sensitive assets beginning close to 20 years before retirement age. Diversifiers received the smallest exposure, with just less than 2%. RRC organized the research in multiple vintages, ranging from 2015 to 2065.
According to the research, median exposure to equity fluctuates from 90% for the 2065 strategies to 30% for the income strategies. The median exposure to fixed income for income strategies was 54%, declining to 5% for the 2060 and 2065 strategies, while the median allocation for inflation-sensitive allocations increased to 10% and rose to 19% for income portfolios, beginning in 2030.
Use of diversifiers was extremely minimal, finds RRC. Allocations range from 4% to 12% throughout multiple years.
The study was first launched in 2017 to provide insight on custom TDFs, including their basic structure, asset allocation, and asset class exposure. 2022 is the third iteration of the study, collecting data through year-end 2021. DCIIA’s RRC surveyed investment managers, glide path managers, and recordkeepers.
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Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
