Customization is critical in retirement saving and planning, and it applies to target-date fund (TDF) investors and their chosen glide paths.
Yet The Morningstar Center for Retirement & Policy Studies found that target-date fund sponsors may expose individual investors to increased risk by not tailoring plan glide paths to their behavior.
The center reports that 58% of defined-contribution plan assets are invested in off-the-shelf TDFs, many of which are designed for participants to stay in the plan through their retirement, even in cases when they are likely to roll their money out of the plan at retirement.
This mismatch could leave participants overly exposed to equities later in their careers.
Other key findings include:
- Plan sponsors overwhelmingly select “through” glide paths, which account for 86% of TDF assets. “To” plan participants hold less equity than “through” counterparts and are exposed to less retirement risk.
- Approximately the same number of assets are left in TDFs after the target date is attained in both “to” and “through” glide paths, at 11% and 14%, respectively, suggesting individuals are unaware of their investment plans and are often defaulted into TDFs. This indicates that sponsors do not consider participants’ individual needs and preferences when selecting a “through” plan or an investment strategy.
- Plan sponsors may not be consistently considering the specific needs of their worker population when selecting a glide path as the amount of equity in TDF plans remains consistent between industries.
Download the Full Report HERE
So, what can be done to combat the level of glide path homogeneity “in off-the-shelf products that employers use given the heterogeneity of their workers’ needs?”
The authors make three recommendations to the Department of Labor:
- Plan sponsors and advisors should regularly consider the key assumptions in their glide paths and their actual experience with participant behavior, as the Department of Labor suggested in its guidance in 2013.
- The Department of Labor should consider if more guidance could help clarify the role that sponsors need to play, particularly in their review of and evaluation of glide paths, given the differences we see across sectors. The department could also recommend that plan sponsors consider TDFs alongside other QDIA options.
- The Department of Labor should consider promulgating additional guidance or even amending the safe harbor on the use of customized glide paths and perhaps even dynamic allocations between QDIA options based on a participant’s needs.