PEI recently completed our annual glide path analysis based on the responses to our 2017 Target Date Fund (TDF) Request for Information (RFI) that is distributed to all of the leading TDF industry providers. These RFIs, along with PEI’s regular due diligence meetings and calls, give PEI a great deal of insight and granular detail on the glide paths (exposure to various asset classes over time) of these TDF providers. This analysis also helps us to identify important trends in the TDF industry. The major theme we continue to observe is that many of the leading firms have been focusing on new product development as opposed to making material changes to their existing flagship products.
Existing Products Remain Relatively Unchanged
The period from 2012-2014 saw several target date fund providers significantly increase the level of risk in their glide path(s). Multiple factors drove these changes, including increases in assumed life expectancies, rising health care costs in retirement, lowering of asset class return assumptions and also firms simply looking to boost performance relative to peers. However, for the third straight year, the average industry glide path has remained relatively unchanged.
The chart to the right illustrates this level of recent consistency. It depicts the average level of exposure to risk assets (such as equities, real estate, commodities and high yield bonds) for TDF products at the point in their strategic glide path that was 15 years away from retirement at the time. In 2012, the average TDF that was 15 years from retirement had a target allocation of 70% to risk assets. That number climbed to 78% by 2014 and has primarily remained at that level since.
In addition to the glide path consistency, the asset class mix utilized by most providers also has not changed much of late. Some firms have made minor changes to how they size positions in complementary asset classes such as real estate and commodities, however nothing particularly significant.
Additional Product Developments
The aforementioned slowdown in flagship product alterations has coincided with a shift to new product development. As competition in the TDF space continues to escalate (and plan asset flows into TDFs reach new highs), firms are looking to ensure they are being considered regardless of the type of product that Plan Sponsors are looking to offer to their participants.
Since 2012, 40% of existing target date managers have released at least one new product in addition to their original offering. There are two primary ways that providers have expanded their target date product suite:
- Changing the mix of active and passive underlying strategies utilized
- For example, some firms that previously only offered a purely actively managed target date product now also offer a passive product as well, or potentially a “hybrid” option that uses both active and passive underlying strategies
- Changing the fund’s glide path
- Providers that previously offered a glide path with a higher exposure to risk assets in order to protect against longevity risk may now also offer a more moderate glide path, in order to better protect against market risk as well as longevity risk.
- There are some firms that now offer a conservative, moderate and aggressive version of their target date funds.
TDF providers have also continued to expand their offering of less expensive commingled trust versions of their products. There are also a few firms in the industry whose flagship products were started as either commingled trusts or even separate accounts that have recently rolled out mutual fund versions of their strategy. This further illustrates how as the industry matures, firms are looking to ensure they will have the right product to meet the diverse level of client demand.
Retirement income has been a major topic within the retirement industry over the last decade as firms try and develop solutions to help participants deal with drawing down their assets in retirement. Target date providers have played a major role in researching and analyzing different potential solutions to try and help participants (and plan sponsors) solve this problem. This topic was frequently discussed in nearly all of PEI’s meetings and calls with TDF managers up until a few years ago, when it seemed to be somewhat less of a priority. However, we have seen retirement income come back into focus over the last year during our conversations with TDF providers, particularly around future product development.
The two main types of options being evaluated for development are ones that include an insurance component vs. those that are strictly investment-only products. Within the insurance component category, State Street Global Advisors is in the process of rolling out a separate target date fund in which the participant begins setting money aside at 55 to purchase a deferred annuity at the age of 65. A recent example on the investment-only side occurred last year when T. Rowe Price released their Retirement Income 2020 fund. This fund follows a similar glide path of their Retirement Target Date funds, although with a greater focus on monthly distributions post retirement. While development of these types of products are in the early stages, it is a growing trend that PEI will continue to monitor closely on behalf of our clients.