What You Need to Know

Target-date funds are becoming the most critical pool of assets for meeting the American worker’s retirement needs. But we fear that many current funds don’t incorporate today’s best practices and solutions. We’ve researched and developed an improved glide path design that will potentially reduce risk and build more retirement income—and better equip America’s workers for retirement’s financial needs.

Target-date funds’ stake

Of total plan default investments, 2014

Initial yield of hypothetical 60/40

Stock/bond portfolio: 12/31/2014

Correlation of fixed-income diversifiers

To US Treasuries, 2000-2014

Target-date funds are the key to the future of retirement savings for American workers. While these funds have seen tremendous asset growth over the past decade, their investment design hasn’t kept pace with available innovations. The result: many target-date strategies may fail to guard against today’s heightened retirement risks.

It’s time to revisit target-date fund designs and single-manager structures. Most retirement plans still use traditional designs that were adopted years ago, but fiduciary standards have changed. In fact, the US Department of Labor (DOL) has issued “Target Date Retirement Funds: Tips for ERISA Plan Fiduciaries,” which highlights the need for plan sponsors to have a solid process for selecting and monitoring their target-date choice.

The investment environment has changed, too. A broader range of strategies is now available and time-tested, beyond traditional equity and fixed income. These strategies can help reduce sensitivity to market, interest-rate and inflation risks at different points in the glide path. And diversifying against these risks can improve overall outcomes versus a traditional glide path roughly 80% of the time.

We see five key areas (Display below) for evolving the state of target-date design:

  • Moving from a single investment manager to a multi-manager or open-architecture format to access best-of-breed managers and reduce concentration risk
  • Display
  • Diversifying the underlying investment mix from a traditional stock/bond glide path to incorporate nontraditional asset classes, too
  • Providing greater flexibility to respond to short-term market fluctuations with a dynamic, rather than static, approach
  • Mixing active and passive investing strategies to enhance risk-adjusted returns and manage costs
  • Calibrating the glide path to deliver better results in the distribution phase of a retirement plan—a critical but often overlooked component of any retirement solution

AB has already applied these research insights to create better target-date solutions for large institutional retirement plans. We believe that this design will be the future of target-date funds for plans of all sizes.

Updating Retirement Reality

Ten years ago, we published our first blueprint for target-date design. It was based on thorough research and a detailed analysis of what we found to be best practices for constructing a sensible glide path. A lot has changed since then. There are new tools available—new asset classes, new approaches to handling volatile market conditions and new interest in open-architecture structures that accommodate multiple investment managers. Most importantly, the Pension Protection Act of 2006 and regulations from the DOL gave new support to three types of all-in-one portfolios—target-date funds, balanced funds and managed accounts. These steps essentially blessed these asset-allocation investments as qualified default investment alternatives (QDIAs) with safe-harbor protections.

Past performance, historical and current analyses, and expectations do not guarantee future results. There can be no assurance that any investment objectives will be achieved. The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AB or its affiliates.

The views expressed herein do not constitute research, investment advice, or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

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