Fidelity Research Reveals How Target Date Strategies Can Help Address Plan Sponsors’ Top Concerns
Andrew Dierdorf, Portfolio Manager, Fidelity
PLANADVISER: Plan sponsors have been making many plan design and investment menu changes over the past two years. What types of changes do they make most frequently, and how do these plan adjustments help participants’ reach their long-term retirement goals?
Andrew Dierdorf: Our research shows that of the 92% of plan sponsors who made plan design and investment menu changes, 42% added automatic enrollment and 30% enrolled or re-enrolled in target date strategies. These findings suggest plan sponsors are engaged and continue to seek ways to improve retirement outcomes for their participants. We believe that these types of features can improve outcomes, and there is an opportunity for advisors to take a more active and consultative approach with plan sponsors. The top three reasons plan sponsors make investment menu changes are to address performance issues, reduce fees, or adjust their plan investment strategy. Our focus on target date strategies at Fidelity is consistent with these learnings. The investment process for our target date strategies has delivered performance that may help investors meet their retirement goals; additionally we offer low-cost solutions and product choice with active, index, and blended strategies.
PA: Participants are increasingly delaying retirement due to their lack of retirement savings. How can plan sponsors incorporate income replacement as an important objective when evaluating target date providers?
Dierdorf: We’ve learned that 80% of plan sponsors have employees who are delaying retirement because they don’t have enough in savings. This number is meaningfully higher than many might expect. Based on target date research from earlier this year, we know that good savings behaviors and investment performance can impact retirement outcomes. Assuming a typical return environment, a participant saving 7% over their lifetime can replace a minimum of 35% of their income in retirement, while someone saving 15% can replace a minimum of 75%. That’s a big difference, and the gap widens if the investment manager delivers added value through investment performance. As a common default investment for many participants, target date strategies are critical to DC plans. And advisors working with plan sponsors have an opportunity to help them evaluate and select the right strategy for their plans. Selecting a target date provider who focuses on replacing income in retirement and who has deep investment capabilities, robust risk management tools, and a flexible investment process is critical in helping participants achieve their retirement savings goal.
PA: How does Fidelity design its target date strategies to help address the challenges that participants face in savings and investing?
Dierdorf: Fidelity’s goal is to help participants maintain their standard of living in retirement by balancing risk and reward throughout their lifetimes. We take a lifetime approach when designing our target date strategies, meaning that we continue to adjust the asset allocation up to and after the expected retirement date (known as a ‘Through’ glide path). Fidelity’s glide path is informed by our research on capital markets, strategic asset allocation, and investor needs, balancing long-term outcomes with short-term portfolio volatility. We emphasize diversification, flexibility, and risk management, giving our target date strategies the ability to adapt to market volatility and investors’ changing needs over long time horizons. Helping participants achieve successful outcomes in retirement involves both good savings behaviors and utilizing a disciplined investment strategy. By understanding the different approaches providers take, advisors can help plan sponsors select the target date strategy best suited to help participants reach their goals.
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IMPORTANT: All data and information are from the following sources unless otherwise specified:
Survey summary: The eRewards panel from Research Now, an independent market research company, conducted an online survey of 1,106 plan sponsors on behalf of Fidelity during February and March 2017. Respondents were identified as the primary person responsible for managing their organization’s 401(k) plan (with at least 25 participants and $10 million in plan assets), and the survey focused on those plan sponsors (890, or approximately 80%) using the services of a financial advisor or plan consultant. Fidelity Investments was not identified as the survey sponsor. The experiences of the plan sponsors who responded to the survey may not be representative of those other plan sponsors who use the services of an advisor.
Target date funds are designed for investors expecting to retire around the year indicated in each fund’s name. The funds are managed to gradually become more conservative over time as they approach the target date. The investment risk of each target date fund changes over time as the fund’s asset allocation changes. They are subject to the volatility of the financial markets, including that of equity and fixed income investments in the U.S. and abroad, and may be subject to risks associated with investing in high-yield, small-cap, and foreign securities. Principal invested is not guaranteed at any time, including at or after the funds’ target dates.
Target date portfolios are designed to help achieve the retirement objectives of a large percentage of individuals, but the stated objectives may not be entirely applicable to all investors due to varying individual circumstances, including retirement savings plan contribution limitations.
1Retirement Income Methodology: We simulated 100,000 different performance paths that a target date strategy could take over an investor’s lifetime (ages 25 through 93). using stochastic, or randomly generated, simulations. Using Fidelity’s strategic glide path as a proxy for a target date fund’s glide path (i.e., time-varying strategic asset allocation), we simulated the returns for U.S. stocks, foreign stocks, U.S. investment-grade bonds, and short-term investments, based upon historical index performance for each asset class, to evaluate the potential range of outcomes for our three saver profiles. Saver profiles: 3% saver assumes auto-enrollment at 3% and no increase thereafter, 7% saver assumes enrollment at 7% with no increase thereafter, 15% saver assumes enrolled at 6% with a 1% auto-increase thereafter up to 18%. To measure the influence of investment performance on our three retirement saver profiles, we evaluated the potential outcomes in three different hypothetical return environments over the approximately 70-year planning horizon (ages 25 to 93). We divided 100,000 different market simulations into three distinct categories based on their average annual inflation-adjusted return and labeled them as follows: “Poor” return environment: 3% inflation-adjusted return (the median return of the bottom third of all simulated returns); “Typical” return environment: 5% inflation-adjusted return (the median return of the middle third of all simulated returns); “Favorable” return environment: 7% inflation-adjusted return (the median return of the top third of all simulated returns). For the purposes of this research, the strategic asset allocation (i.e., Fidelity’s glide path) was held constant throughout the life cycle; no deviations were made to the glide path during the approximately 70-year horizon. Each bar represents the minimum level of attainable real income replacement given an investor’s hypothetical return experience, with 90% confidence. For example, in 90% of the simulated scenarios, the “6%–18% Saver” investing through a “Typical” return environment would realize an income replacement rate of 75% or greater of their final pre-retirement salary. While indexes can provide insight on how asset classes have performed during historical market cycles, they do not take into account key factors such as fund expenses or portfolio manager investment decisions, and should not be considered representative of how a fund has, or will perform. Index performance included the reinvestment of dividends and interest income. Indexes are unmanaged. It is not possible to invest directly in an index. IMPORTANT: The projections regarding the likelihood of various outcomes are hypothetical in nature, do not reflect actual investment results, and are in no way guarantees of future results.
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