Meet myTDF: A More Precise Path To and Through Retirement
Text on screen: PIMCO
Text on screen: Sean Klein, Quantitative Research Analyst, Client Solutions and Analytics
Sean Klein: Target date funds are a staple of defined contribution plans in the United States. They provide plan participants thoughtful asset allocations they can enjoy over their entire working life and well into retirement.
As a result, target date funds are the default option for many and now account for the majority of savings into defined contribution plans in the United States.
FULL PAGE GRAPHIC: TITLE – Equity allocation in hypothetical Target Date Fund. Chart with downward sloping green dotted line mimics a glide path with equity exposure decreasing over time, and derisking as a participant ages.
A key feature of these solutions is that they evolve over time: the allocations shift from stocks to bonds, derisking as a participant ages, in what’s referred to as the glide path.
The downward sloping nature of glide paths are their defining feature and is driven by the changing relationship between a participant’s invested assets and their future contributions.
FULL PAGE GRAPHIC: TITLE – Equity allocation in hypothetical Target Date Fund. Chart with downward sloping green dotted line mimics a glide path with equity exposure decreasing over time, and derisking as a participant ages. At the top of the chart, there is a table with five boxes: the first box says age, the second box says current annual salary; the third box says current 401(k) balance; the fourth box says participant contribution rate.
things like their overall salary, their balance, how much they save, and even the size of their employer’s match rate.
FULL PAGE GRAPHIC: TITLE – Equity allocation in hypothetical Target Date Fund. Chart with downward sloping green dotted line mimics a glide path with equity exposure decreasing over time, and derisking as a participant ages.
These inputs – all of which are readily available by the way -- vary substantially and lead to a wide range of optimal glide paths.
FULL PAGE GRAPHIC: TITLE – Participants inputs for glide path design. Table with two rows down and six across. Top row -- the first box says age, the second box says current annual salary; the third box says current 401(k) balance; the fourth box says participant contribution rate; the fifth box says employee match. Bottom row -- the first box says Traditional TDF; the second box says Personalized, the third box says National Averages; the fourth box says National Averages; the fifth box National Averages; the fifth box says National Averages; the sixth box says National Averages.
target date funds are not built this way. Instead, they embed assumptions about these key variables based on national averages. These assumptions end up determining the glide path, and from there, participants are often defaulted into a vintage based on their age, at least, their age within a 5-year range.
Now there is a tremendous amount of diversity across plan participants. As an example, let’s consider 40-50 year olds, that’s right where glide paths start to meaningfully derisk. This group is incredibly broad. The 95th percentile of their income is something like $220,000, that’s just about five times the median. The differences in DC wealth are larger still: 95th percentile balances are just about $1M, that’s over 32 times the median for this group!
FULL PAGE GRAPHIC: TITLE – Participants inputs for glide path design. Table with two rows down and six across. Top row -- the first box says age, the second box says current annual salary; the third box says current 401(k) balance; the fourth box says participant contribution rate; the fifth box says employee match. Bottom row -- the first box says Traditional TDF; the second box says Personalized, the third box says National Averages; the fourth box says National Averages; the fifth box National Averages; the fifth box says National Averages; the sixth box says National Averages. Third row -- the first box says Personalized TDF; and the rest of the five boxes say Personalized.
Simply put, no participant is average and each has their own unique circumstances. Rather than a single offering, personalized target date solutions may use participant-specific data on wages, balances, savings and company match rates to create a glide path that’s tailored to each individual.
FULL PAGE GRAPHIC: TITLE –Same plan participant population. Chart with downward a sloping band of blue dots, which represent the equity exposure of all of the individuals in a sample plan when invested in myTDF. Text on screen: Blue dots represent the same participants’ equity exposure in a personalized target date.
This results in a wide range of expected outcomes relative to a one size fits all implementation.
Personalization has meaningful potential impacts. We can easily have two participants who would otherwise be placed into the same target date vintage, have personalized allocations that differ by 20 percentage points or more. That’s a difference that corresponds to a twenty or thirty year age gap in a typical target date fund.
In fact, our analysis suggests that only 1% of participants would have an optimal asset allocation that corresponds exactly to a single target date vintage. Perhaps most importantly, this sort of personalization is possible while still preserving the ease and simplicity offered by traditional target dates. myTDF, PIMCO’s personalized target date offering, leverages existing technology and our suite of off the shelf solutions to deliver a personalized approach to plan participants.
Text on screen: For more insights and information visit pimco.com.
Text on screen: PIMCO
Recorded 15 March 2022
Disclosure
IMPORTANT NOTICE
Please note that the following contains the opinions of the manager as of the date noted, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.
PIMCO and myTDF® are trademarks of Allianz Asset Management of America LLC in the United States and throughout the world.
myTDF is offered by Pacific Investment Management Company LLC, a registered investment adviser, and is intended for citizens and legal residents of the United States and its territories. Investment advice generated by myTDF is based on information provided and limited to the investment options available in the defined contribution or defined benefit plan. Projections and other information regarding the likelihood of various retirement income and/or investment outcomes are hypothetical in nature, do not reflect actual results, and are not guarantees of future results. Results may vary with each use and over time. myTDF may be covered by one or more U.S. or international patents.
myTDF is a defined contribution or defined benefit plan or defined contribution plan solution that allows a plan participant to personalize their target date fund allocation across multiple vintages based on participant inputs using PIMCO proprietary funds.
All investments contain risk and may lose value.
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.
Glide Path is the asset allocation within a Target Date Strategy (also known as a Lifecycle or Target Maturity strategy) that adjusts over time as the participant’s age increases and their time horizon to retirement shortens. The basis of the Glide Path is to reduce the portfolio risk as the participant’s time horizon decreases. Typically, younger participants with a longer time horizon to retirement have sufficient time to recover from market losses, their investment risk level is higher, and they are able to make larger contributions (depending on various factors such as salary, savings, account balance, etc.). Generally, older participants and eligible retirees have shorter time horizons to retirement and their investment risk level declines as preserving income wealth becomes more important.
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.
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 publication 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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