Are You on the Right Glidepath?
While the term “glidepath” may still be defined by Merriam-Webster as “the proper path of descent for an aircraft preparing to land,” those of us in the retirement planning world know it as the path that TDFs take to gradually reduce their equity exposure at and throughout retirement.
While aircrafts may have a proper path of descent (as defined by the term), TDFs seem to be all over the board in terms of their glidepaths (some are very conservative while others can be pretty aggressive). TDF glidepaths vary due to the different assumptions investment managers make regarding life expectancy, accumulated retirement assets, contribution rates, and rates of return.
One size does not fit all, meaning that there is neither a “best” nor a “right” glidepath. Since we all have our own unique retirement objectives and glidepaths, it is a challenge to select one glidepath (product) for a retirement plan. Plan sponsors need to understand the assumptions made for the glidepath (product) in their plan to determine if those assumptions are appropriate for their plan participants as a collective whole. The decision requires a good understanding of the plan’s demographics. For example, some glidepaths glide to a lower equity exposure at retirement (typically age 65) while others glide to a lower equity exposure through retirement (typically age 85-90). A plan containing participants with well funded participant accounts and participants who typically leave the plan at retirement may be better off with a glidepath that glides to a lower equity exposure at retirement. So, while it is nice to know that the glidepath (to some extent) can be addressed at the plan level, how can participants, as individuals, be sure that they are on the right “glidepath”?
For participants, the decision when selecting a TDF from an already pre-determined glidepath or set of funds (like a “2030”, “2040”, “2050”, etc.) may be just as complex as it is for plan sponsors selecting the glidepath (or, set of funds). While the selected glidepath may be appropriate for most plan participants, there may, and will, be cases where the glidepath’s assumptions don’t perfectly match up with participant assumptions. Understanding the assumptions behind the investment strategy may ultimately help a participant decide whether to go with a “2030” fund or the “2040” fund. While participants may not have much input into the particular glidepath for the fund options within the plan, with the proper education, they do have the opportunity to fine tune where on the glidepath they want to be. Just as a pilot needs to understand how the aircraft works in order to achieve a safe landing, participants and plan sponsors need to have a good understanding of how these funds (and their glidepaths) work, so that their glidepath to retirement can be a smooth one.