Transamerica TDFs Consider More Than Age

According to “Customized Glide Path and Portfolio Construction,” from Transamerica Retirement Solutions, plan sponsors and advisers need a target-date fund solution that works equally well for participants who want a relatively or entirely passive role in retirement planning and those who want to take a more active role. Transamerica contends its custom glide path approach provides an answer to this need.

Jeremy Hersch, vice president and head of asset allocation services for Transamerica Retirement Solutions, tells PLANADVISER, “Our approach to target-date fund glide paths begins with recognizing that retirement plan sponsors and plan advisers probably don’t have as much as time as they need to in terms of choosing investment options. However, by offering them an open architecture approach, with no preferred funds, sponsors and advisers can either build their glide path from scratch or go with a pre-constructed one, depending on what’s best for their plan.”

The paper suggests participants left to their own devices generally make less than optimal decisions when choosing investments, or they make no decisions at all, so a solution is needed that refocuses the average participant’s attention to understandable choices. The solution should also automate investment decisions based on those choices, Hersch says.

“At the participant level, the goal is to simplify the investment process—asking participants what year they want to retire in and what their comfort level is with investment risk. The answers to these two questions can help in automating the investment process for participants, letting them know things that they should be doing, such as rebalancing and diversifying their investments, but aren’t ,” says the Harrison, New York-based Hersch.

The problem with most current target-date funds' glide paths, according to Transamerica, is the investment strategy is based exclusively on time horizon and cannot incorporate other participant characteristics.

To address this drawback, Transamerica’s custom glide path approach enables participants to focus on the two easy-to-understand choices—their anticipated retirement year and their personal risk preference. It then provides a series of well-diversified portfolios constructed within a framework guided by generally accepted investment principles and utilizing the investments offered in the defined contributions plan that have already been carefully screened by the plan’s sponsor.

In addition, the participant’s account is automatically rebalanced initially, and on a quarterly basis thereafter, and is gradually reallocated to a more conservative investment mix over time via a glide path to reduce risk exposure. This customized approach efficiently and automatically delivers a customized portfolio that is designed to be both age- and risk-appropriate, the paper says.

“In the past, plan sponsors were used to using whatever target-date funds were being offered by their provider,” Hersch says. “Now, there are a lot more options.” He says Transamerica's approach offers sponsors and advisers flexibility, control and transparency when it comes to glide paths.

“When it comes to choosing target-date funds, the first thing a plan sponsor needs to do is to make sure the plan has an established, documented process for such selections," according to Hersch. "They also have to look at the benefits of investing in proprietary versus non-proprietary funds, depending on what level of control the plan sponsors wants over the investment options. And they have to consider the risk and objectives of the target-date funds, as well as the asset allocation.”

The main thing plan sponsors need to ask themselves is how comfortable they are with the target-date fund glide path strategy and if it is appropriate for their plan and participants, he adds.

“Every plan should have an investment policy statement (IPS) listing the objectives of the plan. And it’s good to form this policy by getting feedback from plan participants. With each participant having their comfort level with investment risk and time frame in which they want to retire, it’s good to not only choose target-date funds, and accompanying glide paths, that not only factor is your IPS’s objectives but that present enough options, in terms of risk and retirement dates, for participants,” Hersch says.

For more information about how to obtain a copy of the white paper, call 888-401-5826.