Research: Adding Alts To Target-Date Funds Can Boost Savings Outcomes

Including alternative investments such as private market exposure in target-date funds improved returns by 2%, according to research from Georgetown University.

Researchers from the university, along with retirement and insurance advisory Willis Towers Watson, showed that exposing TDFs beyond the traditional stock and bond mix to alternative investments increased savings for use in retirement. The researchers generated 5,000 retirement income projections from simulations of a participant’s working life, including variables such as salary growth, market returns and inflation.

“Greater diversification and the inclusion of alternative assets in DC portfolios can help drive greater returns and deliver improved retirement outcomes for the millions of U.S. workers who rely on them,” according to the report from the Georgetown University Center for Retirement Initiatives at the McCourt School of Public Policy and WTW.

The glide paths and analysis of the report focused on three primary alternative asset classes: real assets, private equity and private credit.

The research, published in December 2022 and called “Can Asset Diversification and Access to Private Markets Improve Retirement Income Outcomes?” found the following for the three TDF structures:

• Stock/bond only: Under adverse scenarios (5th percentile), the DC plan may replace $24,400 or less per $100,000 of pre-retirement annual wages; in favorable scenarios, (75th percentile), it may replace $89,300 or more, with the expected outcome (50th percentile) $60,900.
• Typical TDF: Under adverse scenarios ( 95th percentile), the DC plan may replace $24,600 or less per $100,000 of pre-retirement annual wages; in favorable scenarios (25th percentile), it may replace $90,300 or more, with the expected outcome (50th percentile) $61,600; and
• Expanded TDF: Under adverse scenarios (95th percentile), the DC plan may replace $26,200 or less per $100,000 of pre-retirement annual wages; in favorable scenarios (25th percentile), it may replace $98,000 or more, with the expected outcome (50th percentile) of $66,700.

Researchers categorized TDFs into three types for examination: a stock and bond mix only; a so-called “Typical TDF,” comprising modest amounts of real assets and private credit; and an expanded TDF with the greatest allocations to alternatives.

With the three target-date types, researchers also extrapolated glide-path scenarios of 40 years to retirement, 20 years to retirement, at retirement and in retirement, according to the report.

“Ultimately it is in these more moderate-risk portfolios in the mid-to-retirement dated funds where using alternatives provides the greatest advantage over the TDF industry average, because it is possible to maintain expected returns while reducing portfolio risk using alternatives when the more common approach in TDFs is to add allocations to lower yield core fixed income during this period,” according to the report.