The traditional move away from equities to fixed income over a target-date fund’s glide path is too simplistic to produce optimal outcomes for members, according to Neil Walton.
Speaking at the 2018 Defined Contribution Investment Forum in Toronto in September, Walton, head of investment solutions in the portfolio solutions group at Schroders Investment Management, told attendees that managing the glide path more actively could unlock a great deal of investment return otherwise being left on the table. As DC plan members get closer to retirement, their accumulated assets become larger and are logically the largest right before beginning the decumulation stage, he said. “Do we earn enough returns when the pot size is largest?”
It’s worth deploying a reasonable level of skill on the active side at this stage, according to Walton, who noted it’s a time when, traditionally, investors are the most risk averse.
As well, people don’t have a choice of what economic market conditions they happen to be living through, but the idea that the glide path they set their investments out on should ignore the conditions around them doesn’t make sense, said Walton.
While the glide path’s fundamental mechanism of ratcheting down on equities and up on fixed income assets remains sound, there should be more flexibility for the duration of the path to take best advantage of the market environment and how it impacts equities’ return potential, he noted.
“We can observe risks in short-term market conditions. We can’t tell the future, but we can observe risk,” said Walton. That risk should factor more actively in how equities are held within a target-date fund, he added. “We can set ourselves a reasonable risk budget and use it to guide us through this phase.”
The design of glide paths should evolve to deliver better outcomes based on member needs throughout their lifetimes, including beyond retirement, he said. “We think there is something here of enormous value to participants.”
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