After several years of seeing TDF providers increase their exposure to equities, PEI is finally seeing an end to the trend. Every fall, PEI collects and analyzes the responses to our comprehensive Request for Information (RFI) from roughly 35 of the largest TDF providers. These RFIs give us a great deal of insight and granular detail on the glide path (exposure to various asset classes over time) of these TDF providers and allow us to identify important trends in the TDF space. We have completed our annual glide path analysis based on the responses to the 2015 PEI TDF RFI and the biggest news is that there is no real news. For the first time in a long time, glide path allocations remained fairly steady over the year.
PEI expresses the glide path of TDF providers in terms of the provider’s exposure to growth-seeking assets over time. Growth-seeking assets include U.S. and non-U.S. equities, high-yield bonds, real estate, commodities and emerging-markets debt. These asset classes have a more aggressive risk/return profile, with higher levels of expected volatility. The average TDF provider’s exposure to growth-seeking assets remained mostly steady from 2014 to 2015, with modest increases (up to 1%) in the shorter–dated (closest to the target retirement date) funds. An increased exposure to high-yield and emerging-markets debt accounts for this increase, as equity exposure remained fairly constant.
The average allocation to U.S. equities remained in line with that reported last year. Interestingly, although several of the larger TDF providers, such as Vanguard and American Century, increased their exposure to non-U.S. equities in 2015, a number of smaller providers decreased that exposure, leading the average exposure to non-U.S. equities largely unchanged from 2014 to 2015.
The average overall exposure to fixed income increased modestly, with exposure to emerging-markets debt increasing somewhat (up to 30 basis points) and the average exposure to high-yield bonds increasing by 20 to 40 basis points in all but the longest-dated funds. The increase to higher yielding sectors of the bond market may be in response to what has been a prolonged cycle of low interest rates. In contrast, the average exposure to inflation-protected bonds (TIPS) increased somewhat on the longer end of the glide path, but decreased by as much as 70 basis points in the shorter-dated funds. The modest shift from more interest rate-sensitive areas of the bond market (such as TIPS) to other fixed-income sectors may be in response to the expected rise in interest rates, as TDF providers look to manage duration risk.
The average exposure to commodities decreased modestly – by roughly 20 basis points – along the glide path. The exposure to REITs remained largely unchanged.
While changes to the strategic asset mix of most TDF providers has recently leveled off, it remains an important responsibility of plan fiduciaries to conduct regular reviews of the TDF solution that is offered to their participants.