The Making of a Glide Path
Investor reliance on TDFs underscores the importance of having a disciplined approach to glide path construction.
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The central defining characteristic of a target-date solution is, arguably, its glide path—the level, slope and landing point of the equity allocation over the life of the target-date series.
In this paper, we describe the process and philosophy that underlie the creation of our target-date solutions, including One Choice® Target Date Portfolios and target-date collective investment trusts (CITs). To explain how we arrived at our glide path, we lay out the “balance-of-risks” framework informing our approach to target-date fund (TDF) evaluation and construction. We present our “no-investor-left-behind” philosophy that seeks to provide the highest likelihood of a fully funded retirement for the greatest number of plan participants. Next, we revisit the “to” versus “through” debate and discuss the relationship of glide path slope to risk management, particularly in the crucial years surrounding retirement. We then take the reader through our analysis and third-party research suggesting that retirees in TDFs fare better when the glide path reaches its most conservative allocation precisely at the retirement date and remains flat thereafter.
With an eye toward maximizing risk-adjusted returns, we then address the levels of equity exposure and associated risks at various points along the glide path. We also show how a flatter glide path before retirement is preferable for managing sequence-of-returns risk1, while a flat glide path post-retirement is designed to provide greater certainty around retiree outcomes.
1The risk of market conditions affects the overall returns of an investment portfolio during the period when a retiree is first starting to withdraw money from investments as income. For example, if a retiree has to withdraw income from their portfolio after market prices have fallen, the portfolio may lose out on the potential returns that income could have made once market prices recovered.
You should consider the fund’s investment objectives, risks, charges and expenses carefully before you invest. The fund’s prospectus or summary prospectus, which can be obtained by visiting famericancentury.com, contains this and other information about the fund, and should be read carefully before investing.
The American Century Retirement Date Collective Investment Trust consists of a series of common or collective trust funds established and maintained by Global Trust Company (GTC) under a declaration of trust. American Century Investment Management, Inc. is the adviser to the trust. The trust is not registered with or required to file prospectuses or registration statements with the Securities and Exchange Commission (SEC) or any other regulatory body, and, accordingly, neither is available. The trust is available only to certain qualified retirement plans and governmental plans and is not offered to the general public. Units of the trust are not a bank deposit and not insured or guaranteed by any bank, government entity, the Federal Deposit Insurance Corporation (FDIC) or any other type of deposit insurance. You should carefully consider the investment objectives, risk, charges and expenses of the trusts before investing.
GTC is a non-depository trust company with operations in Woburn, Massachusetts. As an independent fiduciary and fund sponsor, GTC maintains the fund and oversees all compliance related functions for the fund including trade monitoring, pricing, performance, annual reporting and investor eligibility.
This paper does not provide legal or investment advice. Plan fiduciaries should seek appropriate legal or other counsel to evaluate their specific circumstances.
A target date is the approximate year when investors plan to retire or start withdrawing their money. The principal value of the investment is not guaranteed at any time, including at the target date. Each target-date portfolio seeks the highest total return consistent with its asset mix. Each year, the asset mix and weightings are adjusted to be more conservative. In general, as the target year approaches, the portfolio’s allocation becomes more conservative by decreasing the allocation to stocks and increasing the allocation to bonds and money market instruments. The information is not intended as a personalized recommendation or fiduciary advice and should not be relied upon for investment, accounting, legal or tax advice.
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