Included in the responsibilities of retirement plan advisors are helping plan sponsors understand how investments will shape future savings for participants.
In order for employers to make informed decisions that won’t risk fiduciary status, advisors are tasked with helping clients understand the differences between target-date fund (TDF) glide paths and how these strategies can mitigate select types of savings risks.
This includes familiarizing plan sponsors with the concept of “to” vs. “through” glide paths, and how retirement savings can grow with each strategy. While “to” glide paths gradually stop investing once a participant leaves the workforce, “through” glide paths continue to invest in funds even after an employee reaches retirement.
When it comes to derisking, “to” glide paths implement a sharp strategy that pulls investors into conservative allocations at their retirement date, whereas “through” glide paths have a slower-paced process that continues into retirement.
Communicating the distinctions to plan sponsors is critical to helping them understand what is being offered to plan participants, especially when considering accumulation factors, said Jeri Savage, lead retirement strategist at MFS, in an executive Q&A with 401(k) Specialist.
“Fees matter, but the more important question is whether the series’ ‘to’ or ‘through’ retirement positioning, underlying portfolio construction, and risk management support long-term accumulation for the plan’s specific workforce,” she said.
As part of our Deep Dive series, 401(k) Specialist has created a guide for advisors to review when having conversations about “to” and “through” glide paths with plan sponsor clients. Below is a checklist for advisors to consider when explaining these concepts.
Item #1: Match the glide path to your workforce
As participant demographics can widely vary, implementing a glide path tailored to the workforce is crucial. This could mean analyzing the plan type, size, and dispersion of participants prior to selecting a “to” or “through” glide path.
“Given our survey findings that more than 90% of plans offer target-date funds and 86% use them as the QDIA, due diligence should go well beyond confirming a series is on the menu,” said Savage. “Sponsors and advisors should start with participant demographics and behavior. This includes who is in the plan, typical savings rates, and whether participants tend to remain in-plan at retirement or roll assets out, because those factors inform whether the glidepath is fit for purpose.”
Considering the client’s plan philosophy and what the plan sponsor prioritizes for participants is also important. For example, assess whether the client wants participants to stay in the plan during retirement or if they’d rather have them leave. If the client does not want to push participants out of the plan, a “through” option might make more sense, said Jeremy Stempien, managing director and portfolio manager at PGIM DC Solutions. Similarly, a “to” glide path could be a more logical option if people exit the plan at retirement.
However, be careful to avoid basing the decision just on whether participants will stay or leave a plan at retirement, Stempien warns. Even if a plan sponsor offers a “to” glide path, the client still has a fiduciary responsibility to participants who remain in the plan.
Ultimately, participant demographics might matter more when considering risk profiles as it could highlight whether a conservative or aggressive approach is needed. “The demographics might lead you to need a more conservative glide path or a more aggressive glide path than normal, but you can get a ‘to’ vs. ‘through’ glide paths in both flavors as well,” he said.
Once a glide path is selected, ensure plan sponsors are properly communicating to participants about the TDF glide path, how portfolio risk could change overtime, and why the design is intended to support long-term outcomes, said Savage. “Sponsors can reduce confusion by explaining whether their series is designed “to” or “through” retirement, what level of equity exposure may still exist at retirement, and how diversification is managed as participants age,” she explained.
Item #2: Separate fact from fiction
Avoiding some common myths about both glide paths could help plan sponsors better understand what strategy best fits the needs of their workforce.
First, steer clear of thinking that one glide path is inherently riskier than the other. While “through” glide paths offer higher equity at retirement which can result in short-term volatility, the framework is designed to reduce risk overtime by managing threats associated with longevity, inflation, and sequence of returns, Stempien said.
On that same note, “to” glide paths are not necessarily the safest or most conservative option for every participant. While they could reduce downside risk at retirement, they may also increase the risk of running out of money for participants. As reports show longer retirement horizons and lifespans, implementing this option could prove risky for some who might not manage savings accordingly.
“In many ‘to’ designs, the glidepath is built to reach its intended risk level at age 65 and then becomes largely static even as the participant’s time horizon lessens which can represent increasing risk relative to a shortened time horizon,” said Robert Sykes, senior portfolio manager and head of asset allocation, U.S., Multi-Asset Solutions Team at Manulife Investment Management.
Finally, avoid believing that one glide path is inherently superior to the other, Sykes added. “The reason neither glidepath should be positioned as ‘better’ is that they’re solving the retirement problem in different ways, and the trade-off isn’t simply ‘aggressive vs. conservative.’ Our research frames the decision around balancing the probability of income shortfall across time, including the decumulation years and utilizing the long post-retirement period as an asset in growing and sustaining the retirement account balance and supporting income needs.”
Item #3: Spot any red flags
Communicating critical concerns is crucial to ensuring plan sponsors avoid fiduciary risk. This includes implementing a process with strong documentation that shows discussions with the plan sponsor committee, advisor, and plan consultant were had ahead of implementing a glide path.
“Weak documentation is a red flag. If IPS language, meeting minutes, or evaluation notes don’t reflect a deliberate review of glidepath design, including pre- and post-retirement risk management, the plan’s intended retirement outcome, it becomes harder to demonstrate a prudent process,” said Sykes.
Plan sponsors should also document the reason behind their selection. Why do they want to incorporate a moderate, conservative, or aggressive approach? What’s more important, a “to” or “through” glidepath for their plan? Is the glide path actively or passively managed? The process of answering these questions could lead clients to a smaller set of candidates that best fit the plan, Stempien pointed out.
Similar to having a selection process, monitoring the glide path and target-date series after implementation is equally as key. Some target-date series can change glide paths substantially overtime, therefore having a documented rationale for why that series was chosen at the time is vital, said Stempien.
Item #4: Approach glide paths holistically
Rather than just looking at volatility, or longevity, sequence of return risk, or inflation, encourage plan sponsors to consider the full context of the glide path. At the end of the day, the goal should be about creating a successful retirement for participants.
“It shouldn’t be about the top performing glidepath or the cheapest glidepath,” Stempien said. “It should be about the one that provides the best outcome for participants.”