What is your approach to target date investing?

Our primary purpose is to help participants reach the retirement finish line with roughly 90% income replacement, so we take a very long-term view, emphasizing diversification and carefully managing risk, especially as we near the target date.

Our target date funds (TDFs) have an investment horizon of at least 40 years and are diversified within asset classes and across global markets. We believe a truly diversified strategy has the potential to deliver better risk-adjusted returns and provide a smoother investment experience along the way.

How does participant behavior factor into your approach?

Research into participant behavior has been an input into our glide path design – along with our Long-Term Capital Market Assumptions (LTCMAs) – since we launched our first TDF series. Over the years we’ve expanded our access to 401(k) participant and IRA investor data through our partnership with the Employee Benefits Research Institute (EBRI). We’ve studied our proprietary Chase customer data for over a decade, which gives us insights into the saving, spending and borrowing behaviors of approximately half of U.S. households – all anonymous of course. 

Early in their careers, participants have the longest time horizon to save when they are youngest, and the portfolio allocations tend to prioritize returns to specifically address longevity risk. As target date investors approach retirement age, we take a more cautious approach to the equity exposure and focus on managing sequence-of-returns risk – the risk that a participant experiences a significant decrease in asset value that then reduces the compounding potential of those assets. (See our recent article for more insights into Mitigating sequence of return risk.)

Post-retirement we reach our flat allocation to equities of 40% at age 65. Our spending research supports this flat, actively managed 40/60 stock/bond allocation through retirement, which helps balance the need for capital preservation with the growth potential to support spending needs and maintain purchasing power.

How are you thinking about the glide path in light of a constantly changing market environment?

While glide paths are designed with very long time frames in mind, we believe it is a prudent approach for TDF managers to think about changing market environments and how they might impact the glide path allocations on a forward-looking basis. The Multi-Asset Solutions team publishes our LTCMAs annually, which we incorporate into our regular glide path review to determine whether we have the most efficient asset allocation along the glide path needed to achieve our income replacement goal. We’ve come through an extended period of “easy money” and entered a market cycle marked by inflation and the fastest Fed tightening in our lifetimes. This fact creates opportunities to consider whether or not certain asset classes are able to contribute in ways not recently historically available to us. Our LTCMAs indicate that long-term returns for fixed income are now over 4% and the difference between equities and fixed income is not as wide as it was a few years ago. 

Given that backdrop, we found we were able to reduce equites by about 2% at the beginning of the glide path, while still getting more people over the finish line and maintaining our 40% allocation at the end of the glide path to support spending in retirement. At the same time, we re-weighted and reduced our percentage of small- and mid-cap equities and reallocated to U.S. large cap equities. On the fixed income side, we reduced high yield in favor of core fixed income, as the implied returns were somewhat reduced and the spread benefit therefore narrowed.

What is the outlook for the economy from here?

The Multi-Asset Solutions team hosts a strategy summit every quarter that draws on internal and external experts to discuss our outlook for the economy, markets, asset class behavioral expectations, currencies and duration. Our March summit concluded with a reaffirmation of our base case of rebalancing – growth moderating from the current run rate and inflation gradually cooling. Inflation data are a little sticky, but we expect the trajectory to remain downwards and the Fed likely to deliver quarterly cuts this year starting in June. There are still risks out there, and the market is priced for a “goldilocks” environment. Our well-diversified glide path is designed to manage uncertainty – both market and cash flow risks – and deliver more people to the 90% income replacement rate savings outcome safely. This is not the time, in our view, to take a lot of active risk around the glide path and, therefore, we are comfortable letting the glide path do the job it is designed to do.

How do you think about active vs. passive approaches in target date investing?

The defined contribution market has seen a huge shift toward low-cost, passive strategies, and TDFs are no exception. However, we believe the term “passive target date fund” is misleading. All TDFs are actively managed strategies when it comes to the most significant drivers of participant experience, such as asset class diversification, glide path design, underlying investment strategy and portfolio construction.

In reality, “passive” only refers to the underlying strategies used to populate the TDF glide paths. That also means the passive vs. active decision is not an either/or choice. Many TDF providers integrate components of both into their underlying investment strategies: passive investments for asset classes that are easier to index, which can help manage fees, and actively managed investments where managers can add value. We employ this approach in some of our TDFs. Most importantly, the TDF should align with the plan’s objectives and demographics.

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