PEI recently completed our annual glide path analysis based on the responses to our 2018 Target Date Fund (TDF) Request for Information (RFI) that is distributed to all the leading TDF industry providers. These RFIs, along with our 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 main trend that we have recently observed is the continued development of retirement income products by several of the top TDF providers.
Limited Changes to Existing Products
In comparing the prior year’s survey with this year, very little has changed within the industry regarding both glide path allocations and new target date product offerings. From an allocation perspective, there have only been slight adjustments (+/-2%) to allocations along the glide path. The industry saw a marginal increase to equities, specifically international equities based on their more attractive valuations. The increase in global equities was offset by a slight drop in fixed income allocations. Overall, glide paths within the industry have remained fairly static. Regarding product development, a few firms, including T. Rowe Price and Fidelity, rolled out new hybrid active/passive products that utilize preexisting glide paths.
Though target date providers have not drastically changed their products, one area of ongoing development is the continued use of quantitative research, both in the form of underlying investments and risk management. The industry has continued to see an increase in the utilization of quantitatively managed underlying strategies. These investment strategies are intended to generate outperformance at a lower cost than traditional active strategies. From a risk management standpoint, many firms are now employing quantitative tools to ensure their products are positioned as intended to targeted portfolio factors, such as value and momentum.
Increase in Retirement Income Product Development
One area of research that gained steam throughout the year with many managers has been the topic of retirement income. In PEI’s fourth quarter DC Insights from 2017, we mentioned that firms were considering both insurance-based and investment-only type retirement income products. Throughout 2018, it has seemed that the investment-focused products have become the favored method to address the drawdown needs of participants. Many of the major target date providers have either rolled out an investment-based product or have plans to launch a new product within 12 months. These types of products are normally designed to provide a participant in retirement with a predetermined annual payout from the investment.
Operationally, these types of products still face some headwinds within the DC space. Right now, the few products that are available in the market today are only available as out-of-plan options, which means participants would have to actively move their money from their retirement plan into an IRA to invest in the product. At this time, the technology is still being developed on the recordkeeping platforms that can accurately track the balances and participant distributions necessary for these drawdown products to work as intended. For example, T. Rowe Price is currently piloting their Retirement Income 2020 fund on their platform with the hope of offering it as an in-plan option to their clients sometime in the second half of the year.
While these retirement income solutions are in the early stages of being developed and introduced, PEI believes they may ultimately be suitable for plan sponsors looking to offer participants assistance with drawing down their balances in retirement. Plan sponsors who may be interested in utilizing these products should start by assessing their plan documents to determine whether periodic withdrawals are permitted for distributions. PEI will continue to closely monitor the status of these products and provide our clients with relevant updates throughout the year.