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Market volatility, catalyzed by the coronavirus crisis, has dominated the conversation in 2020. In the target date fund space, the built-in diversification, adjusted by age, endeavors to balance retirement savers’ asset accumulation with risk exposure — and has proved reasonably effective during this disruptive period.
Those closest to retirement are the most vulnerable to market swings, having the shortest runway to recover loss. Here, we will explore how “to retirement” funds fared during the first quarter — not only through the lens of wealth preservation, but also wealth accumulation.
By comparing the performance of State Street’s 2020 Fund (where a 65-year-old participant would currently be invested) to the 2020 funds of three large “to retirement” managers, we found that a State Street investor starting at the same dollar amount in 2010 would have accumulated meaningfully higher levels of wealth than investors with the other managers, even after accounting for slightly larger drawdowns at age 65.
In short, asset preservation is an important but insufficient condition for savings success. There must also be ample accumulation. By connecting these concepts, State Street Global Advisors balances volatility, longevity and inflation risks in concert with the long-term objectives that participants seek to achieve.
Figure 1: Ten Years of Wealth Accumulation in 2020 Target Date Fund Vintage
Figure 2: 2020 Target Date Vintage Eases Equity Allocations Over Time
Complementing State Street’s accumulation strategy is our approach to de-risking. Figure 2 reflects State Street’s strategy to hold more risk through retirement to address under-savers, steeply de-risking before age 70 to align the glidepath’s most conservative point with expected withdrawal behavior.
Considering the Full Participant Portrait
Prioritizing market volatility for 65-year-old participants makes sense, but an outsized focus on the market understates the individual’s risk of running out of money in what could be a 25- to 30-year retirement. According to the Employee Benefit Research Institute, the average retirement balance for a full-career participant at age 65 is $280,000, and for many with segmented work histories, balances are considerably lower. To address low balances, many participants today are working longer. Late-career years are key for wealth accumulation, as wages and retirement balances are generally higher than at earlier points in participants’ careers.
Our recent Global Retirement Reality Report (GR3), fielded during May 2020 and capturing participant sentiment amid the COVID-19 crisis, highlights how age plays a meaningful role in retirement optimism and confidence, with those who are mid-career, primarily of the Generation X cohort, feeling the greatest strain. Whether driven by a more complex financial life, a more informed understanding of “what could go wrong” or a larger reconciliation of life’s expectations versus realities, the dip in optimism is noticeable for this group and presents an opportunity for both sponsors and retirement advisors to identify solutions specific to this group’s accumulation needs.
At State Street, we endeavor to solve for all angles of retirement readiness with a glide path that holds sufficient equity exposure through retirement to address longevity risk, while reaching its most conservative point at age 70 in order to align with expected participant withdrawal behavior and prepare for the onset of required minimum distributions. This approach focuses on delivering meaningful levels of real income replacement while mitigating the impact of market volatility on participants nearing retirement. The result is a balanced, broadly diversified set of funds — and the proof is in the performance. In the case of our collective investment trust series, State Street has outperformed 94% of our peers, while also experiencing lower volatility than 76% of the same peer group since inception in 2005, owing in large part to our broadly diversified set of underlying asset classes.i
The views expressed in this material are the views of SSGA Defined Contribution as of July 1, 2020, and are subject to change based on market and other conditions.
This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Investing involves risk, including the risk of loss of principal. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
Diversification does not ensure a profit or guarantee against loss.
State Street Global Advisors Target Date Funds are designed for investors expecting to retire around the year indicated in each fund’s name. When choosing a fund, investors should consider whether they anticipate retiring significantly earlier or later than age 65 even if such investors retire on or near a fund’s approximate target date. There may be other considerations relevant to fund selection and investors should select the fund that best meets their individual circumstances and investment goals. The funds' asset allocation strategy becomes increasingly conservative as they approach the target date and beyond. The investment risks of each fund change over time as its asset allocation changes.
Assumptions and forecasts used by State Street Global Advisors in developing the portfolio’s asset allocation glidepath may not be in line with future capital market returns and participant savings activities, which could result in losses near, at or after the target date year or could result in the portfolio not providing adequate income at and through retirement.
All the performance results referred to are provided exclusively for comparison purposes only. It should not be assumed that they represent the performance of any particular investment.
iFactSet Research Systems, Morningstar, SSGA Investment Solutions Group (ISG). As of March 31, 2020. Gross returns have been reduced by 9.4 basis points (.7833 basis points monthly) to reflect a hypothetical investment management fee and compared to Morningstar peer universe for each respective vintage. Returns are net administrative costs (2.6 bps). Inception dates: 2040, 2030, 2010 Strategies (2/05); 2020 Income Strategies (4/05); 2015, 2025, 2035, 2045 Strategies (8/06); 2050 Strategy (10/07); 2055 Strategy (3/10); 2060 Strategy (3/15). Past performance is not a guarantee of future results. Performance returns were calculated in US dollars. The total number of firms with a 2020 fund vintage for the 10 years detailed in the paper is 134.
This information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.
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