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Russell Investments Communiqué
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Steve Murray
INVESTMENT FOCUS
Target date funds (TDFs) are a popular investment solution
for defined contribution (DC) plans,
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providing a diversified,
age-appropriate portfolio through a process that requires no
participant input. Participants do not need to know how to
invest retirement assets nor do they need to frequently check
to see if the portfolio requires adjustment. The age-based
allocation of TDFs automatically adjusts based on the time
remaining until retirement
Russell Investments has developed Adaptive Retirement Accounts (ARA), an adaptive
solution customized to each participant’s situation. ARA improves on the TDF advice by
considering additional inputs such as account balance, salary and savings patterns. Better
solutions can be customized for each individual than is possible under the one-size-fits-all,
age-based target date approach.
ARA is designed as a Qualified Default Investment Alternative (QDIA) and relies on data
that can be collected from plan recordkeeping systems and plan sponsors. ARA also
takes into account estimated Social Security benefits. It is designed to work well even
for participants who are not strongly engaged in their retirement planning and allows
for more comprehensive advice if participants are willing to include information about
other retirement resources. To keep participants on target for a successful retirement,
ARA adjusts market exposures as participant circumstances change either due to market
experience or to changes in salary, savings or other characteristics.
TYPICAL PARTICIPANTS VERSUS ACTUAL PARTICIPANTS
While glide paths from some providers may still be constructed through a subjective
assessment of the “appropriate” amount of risk for participants of each age, Russell
Investments and many other providers follow a more quantitative approach.
Our standard glide path is organized around characteristics of typical U.S. DC
participants
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(age at which working life begins, standard retirement age, salary and
savings patterns – including employer match), but we also construct custom glide paths
based on the characteristics of the participants in a specific DC plan. The custom glide
paths incorporate the typical salary and savings patterns for that specific population
including the employer match, specific employee mortality assumptions (if appropriate),
retirement dates, available DB benefits and other plan-specific information.
STRATEGY
TIMING IMPLEMENTATION
Adaptive investing –
better data makes better solutions
By: Steve Murray, Ph.D., CFA, Head of DC Solutions, Global Client Strategy & Research
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Based on the PSCA 58th Annual
Survey (Table 81), TDFs serve as
the QDIA for almost 75% of plans
with greater usage in plans with
more participants. Casey Quirk &
Associates has estimated total TDF
assets at $760 billion at the end of
2015 and expects that number to
grow to $3.7 trillion by 2019 with
88% of new contributions flowing
into TDFs by 2019.
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The profile is regularly reviewed as
part of the ongoing process in which
all Russell Investments’ portfolios
are governed. Due to the long-term
nature of the glide path, changes
are infrequent and in response to
meaningful shifts in the participant
profiles or market conditions. The
most recent revision was in 2014
(see Y. Fan, D. Gardner, J. Greves
and S. Murray, “Review of Russell’s
Target Date Fund Methodology,”
Russell Investments, 2014).