Portfolio experts Aul and Zhang unpack their dynamic strategies for mitigating risk, moving beyond the 'set it and forget it' approach in target date funds
Target-date funds are a popular strategy for plan sponsors, offering plan members a lifelong investment trajectory. From aggressive wealth accumulation to preservation and sustainable income, determining the glidepath is the most important step in target date fund design—because it has the most impact on plan members’ wealth.
Glidepaths can vary in several ways, with each striking a potentially different balance between asset accumulation, wealth protection and eventual decumulation. SLGI Asset Management Inc. (SLGI), therefore, employs stringent stress tests to determine the appropriate amount of risk while understanding this is not a set-it-and-forget-it process.
In an interview with Benefits and Pensions Monitor, SLGI experts Chhad Aul, chief investment officer, and Jason Zhang, portfolio manager, explain how to build a stronger glidepath with laser focus on retirement outcomes.
“When people think about market risk, they tend to focus on the downside risk,” Zhang says. “That’s important, but we also want to ensure our younger plan members have the opportunity to grow their assets – because accumulating a strong asset base proves to be one of the biggest drivers when it comes to delivering strong retirement outcomes.’
In the article, the experts share the most significant risks that plan members face—and they are trying to mitigate against—including:
- Market risk: The goal isn't just to protect clients from market downturns but also to capitalize on market upswings during the accumulation phase.
- Sequence risk: This arises when plan members shift funds during significant market downturns, often leading to unfavorable retirement outcomes.
- Longevity risk: With people living around 25 years post-retirement, investment strategies must ensure savings don't deplete prematurely.
- Inflation risk: Current record-high inflation rates threaten the real value of retirement savings, making it a crucial factor in glidepath design.
They also explain, in detail, the rigorous tests they employ, looking at both pre-retirement and post-retirement, to help them determine the optimal target date fund glidepath.
Aul and Zhang know that while glidepath design is grounded in meticulous science, there's also an art in striking the right balance. For portfolio managers, understanding these intricacies guides their glidepath decisions—and ultimately helps plan members achieve the outcomes they need to live the retirement they desire.