DC Consulting Study Insights: The Rise of Target Date Funds as a Retirement Income Solution

Text on screen: PIMCO

Text on screen: Joe Szalay, SENIOR VICE PRESIDENT, DC SOLUTIONS

Szalay: Retirement income has become a major focus for plan sponsors and consultants. According to PIMCO’s 2024 Defined Contribution Consulting Study, evaluating retirement income solutions is cited as the number one priority for plan sponsors. Recent trends show progress in improving plan design and communications intended to improve the overall experience for retirees who wish to keep their savings in the retirement plan.

Now today as plan sponsors are exploring various retirement income strategies, many are turning to their current target date fund to understand its capabilities as a retirement income solution that potentially supports participant spending needs. In fact, PIMCO’s DC Study reveals that 93% of consultants recommend a target date fund as the preferred vehicle to deliver non-guaranteed retirement income.

Text on screen: TITLE - Why are target date funds increasingly being repurposed as a retirement income solution? BULLETS – Familiar investments, Ease of communication, Seamless transition

So why are target date funds increasingly being repurposed as a retirement income solution?

Well for one, they are a familiar investment to many. Participants are already acquainted with target date funds, having seen and used them throughout their working years.

Second, communications can start early. Plan sponsors can initiate communication about a target date funds potential income generation and decumulation capabilities well before participants reach retirement age. This early engagement may help prepare participants for the transition to retirement income, by helping them understand the benefits and mechanics of target date funds as a spending solution.

And lastly it’s a seamless transition. Participants are automatically transitioned into the retirement vintage of the target date fund as they approach retirement age. This automatic transition eliminates the need for participants to take additional step to transfer into a retirement income strategy.

The question then is, how can sponsors and consultants assess the retirement income capabilities of a target date fund?

Text on screen: TITLE - How can sponsors and consultants assess the retirement income capabilities of a target date fund? BULLETS - Downside Protection at the Point of Retirement, Level and Consistency of Income Provided, Ability to Hedge Inflation, Ease of Implementation and Platform Availability

Here are the most common factors that we see assessed today. One, Downside Protection at the Point of Retirement. The day an individual retires is often considered the riskiest day of their financial life. This is because they will no longer earn a paycheck and must rely on their retirement savings for the longest period. What to assess? It is essential to understand the downside risk mitigation toolkit that target date fund is utilizing. You want to look at the longer term volatility of the retirement vintage, as well as the experience that participants have endured during market selloffs.

Something else to consider is the Level and Consistency of Income Provided. Many participants prefer to grow, or at least maintain their account balances during retirement, while only withdrawing the income from their investments to support spending needs. target date funds that seek to generate a higher yield, may support greater spending, while also providing a reliable and consistent income stream in retirement. So it’s important to understand how that target date fund seeks to generate income and how high and consistent the income has historically been over time. It’s important to look at what return sources drive outcomes for participants, and how diversified those return sources are.

Another aspect to think about is the Ability to Hedge Inflation. We know that those who are actively spending their account may be immediately impacted by higher inflation, potentially increasing the need for real assets or inflation fighting assets within their portfolio. What to assess. It’s important to understand that TDF's overall level and diversity of inflation hedging toolkit. Does the TDF provider utilize real assets or do they rely solely on market returns to outpace inflation over time. A well-rounded strategy that includes real assets can offer more robust hedge against inflation that participants may face.

And lastly, Ease of Implementation and Platform Availability. Understanding the availability of a TDF across the record keeping ecosystem is paramount. Also understanding any additional bills required for on boarding and also how that TDF is going to link with the record keepers distribution capabilities.

So inconclusion for the listeners today that are exploring retirement options we would encourage you to reach out to your PIMCO representatives to understand the tools and resources available in assessing a TDF ability to deliver on this retirement income objective. Thank you.

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Text on screen: PIMCO

This material contains opinions of survey respondents as of the date noted and not necessarily those of PIMCO. Such opinions are subject to change without notice and may not have been updated to reflect real time market developments. The results have been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. All responses were collected from January 8, 2024 through February 26, 2024.

Disclosure

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed.

There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

Target Date Funds are designed to provide investors with a retirement solution tailored to the time when they expect to retire or plan to start withdrawing money (the "target date"). Target Date Funds will gradually shift their emphasis from more aggressive investments to more conservative ones based on their target dates. Target Date Funds invest in other funds and instruments based on a long-term asset allocation glide path developed by PIMCO, and performance is subject to underlying investment weightings, which will change over time. An investment in a Target Date Fund does not eliminate the need for an investor to determine whether a Fund is appropriate for his or her financial situation. An investment in a Fund is not guaranteed.  Investors may experience losses, including losses near, at, or after the target date, and there is no guarantee that a Fund will provide adequate income at and through retirement.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2024, PIMCO.

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