Allocation in Retirement: A Flat Glide Path Always Make Sense
by Josh Cohen
You’ve probably heard about Ali versus Frazier and Coke versus Pepsi. But have you heard about the next great debate—in the defined-contribution industry—known as “to” versus “through”?
This debate centers on what type of glide path (evolving mix of stocks and bonds) should be designed once a target date fund reaches the target year of an individual’s retirement.
The investment industry has characterized the “to” camp as proponents of the idea that target date funds should be designed primarily to build savings up to an individual’s target retirement date. Target date funds exemplifying the “to” principle have more conservative allocations to stocks (or other risky assets) at an individual’s target retirement date, typically with a flat or static allocation during later retirement years.
In contrast, the “through” side has been defined as those who believe target date funds should be designed to help investors save through retirement. The “through” camp reasons that because of increased longevity, investors need their accumulated balances to last them long after retirement. Target date funds employing the “through” approach may have higher allocations to stocks at an individual’s target retirement date, with a declining allocation to stocks for 15 to 30 years after retirement.
The distinction between “to” versus “through” philosophies took shape at a hearing held by the Securities and Exchange Commission SEC and Department of Labor on target date funds in June 2009. These agencies were trying to better understand how there could be such wide differences in the performance of 2010 target date funds from different providers. For example, the Morningstar Direct universe of 2000–2010 target date funds had a range of returns in 2008 from –3.6% to –41.8%. That caused many to scratch their heads and ask “How could strategies designed for the same person have such different results?”
To read more, please become an AAII member or CLICK HERE.