Why Target Date Funds Should be Lower Risk for Populations without Defined Benefit Plans
Executive Summary
- The U.S. Department of Labor (DOL) has provided guidance for fiduciaries of defined contribution (DC) plans to consider the demographics of the plan populations in assessing the suitability of target date fund (TDF) glide paths.
- DC plan populations without a defined benefit plan are often (but not always) well-suited for lower-than-average-risk TDFs. This is because participants with only DC plans are more exposed to a market downturn. This issue is particularly important for those near retirement age.
- The prevalence of defined benefit pensions has been declining for decades, and this trend will continue. However, a significant segment of employees of large companies still have such benefits, especially those over age 45. As those employees transition to retirement over the next two decades, the typical TDF will need to gradually adjust its glide path to reflect lower risk tolerances across older ages.
- Addressing these population characteristics can be done with either an off-the-shelf product or a custom TDF.
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