Suitability Matters: Balancing Risks in Glide Path Design

Executive Summary

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, One Choice® Blend+ Portfolios and related target-date collective investment trusts. To explain how we construct a glide path, we lay out the “balance-of-risks” framework informing our approach to target-date fund (TDF) evaluation and construction. We present our glide path 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 around the retirement date and how changing retirement trends may require updated thinking around a “one and done” retirement date.

We conclude there is no single “best” glide path or target-date strategy—no “one ring to rule them all.” Rather, the best fit for a given plan is largely a function of participant savings rates, wealth levels, risk tolerance and a host of other plan-specific needs or objectives. Indeed, we offer plan sponsors and retirement advisors a range of tools to address these questions. Whatever the glide path decision, we believe an approach that recognizes and addresses multiple risks over the investor life cycle is preferable to glide paths attuned only to one type of risk or market environment.

American Century’s Glide Path Philosophy 

Suitability matters.

We believe variations in risk tolerance, savings patterns and other demographic factors can lead to subtle differences in suitable glide path risk levels over a participant’s life cycle.

Our glide path philosophy is built around our balance-of-risks framework.

The American Century framework seeks to address the multiple retirement risks that can alternate in relative importance during an investor’s life cycle. We believe by emphasizing this balanced approach, we’ll also address behavioral risks important to investor success.

Our guiding principle is to seek to increase the likelihood of success for the greatest number of participants.

We show that a balance-of-risks approach has generated attractive risk-adjusted returns and greater wealth accumulation over a full market cycle. We find this approach results in less dispersion in retirement wealth among simulated long-run outcomes of participant scenarios versus competing approaches.

We prefer flatter glide paths.

Our research indicates flat glide paths are superior to those that continue to de-risk during retirement because they best calibrate equity risk to account balances. This approach also conforms with human capital arguments about retirement allocations, with the glide path remaining flat beyond the point at which an investor’s future earnings reach zero.

Sequence-of-returns risk may likely be reduced with flatter glide paths.

We demonstrate that a flatter glide path before retirement is preferable for managing sequence-of-returns risk relative to glide paths that de-risk more rapidly.*

Flat slope in retirement may improve distribution of outcomes.

Not only are there benefits to a flatter glide path before retirement, but also afterwards by contributing to greater certainty around retiree outcomes.

Appropriate risk levels may generate more attractive risk-adjusted returns.

We believe it’s important to manage downside risks along the glide path with the intention of minimizing large losses and providing better risk-adjusted returns for participants.