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A debate about target-date funds has emerged in the industry. Should a target-date fund glidepath be constructed with the assumption that retirement is the end date ("to retirement"), or should a glidepath be designed to last effectively until the presumed end of a participant's life ("through retirement")? The authors of this article provide various investment simulations under two glidepaths to address the different impact on income replacement ratios of managing glidepaths "to retirement" versus "through retirement." They find that one size does not fit all plans in target-date investing any more than it does in other types of investing, and that the vast differences in target-date fund glidepaths can be viewed as a virtue, allowing plan sponsors to tailor the target-date fund to their particular plan needs.
A debate about target-date funds has emerged in the industry and is even reaching the halls of government. Indeed, at the June 18 U.S. Department of Labor/ Securities and Exchange Commission hearing on target-date funds and similar investment options, the question arose repeatedly: Should target-date fund glidepaths be constructed with the assumption that retirement is the end date, or should the glidepath be designed to last effectively until the presumed end of a participant's life - which would be many years later?
The ramifications of whether target-date fund equity allocations are managed "to" or "through" retirement are profound, as target-date funds are a qualified default investment alternative (QDIA) in the majority of 401 (k) and other defined contribution (DC) plans. Figure 1 illustrates the dynamic equity exposures1 of three off-the-shelf target-date funds that highlight a broad range of glidepath (or asset al- location) designs over time. For example, target-date fund C starts its glidepath with 90% in equities, but rolls down dramatically to 16% by retirement at the age of 65. The age of 65 represents the target-date fund's terminal date - the date when its asset alloca- tion becomes static and no longer changes over time. By contrast, target-date fund A starts with slightly more in equities (95%), but importantly has a much higher equity allocation - over 60% - at the age of 65. It continues to roll down through the age of 76 before becoming static with 35% in equities at the age...