We can build on this base depending on a sponsor’s needs. Our analysis includes the following factors:
Demographic Characteristics of the Population
In our off-the-shelf glidepath design, we assume that participants retire at an average age of 65 and experience fairly steady wage growth throughout their careers. If the plan participants have a very different retirement age or wage growth path, this could be a reason to design a custom glidepath aligned with the plan demographics.
Many adjustments for “demographic characteristics” can be effectively addressed through plan design modifications rather than custom glidepath design. For example, if employees are not participating in the retirement savings plan, design modifications like automatic enrollment may provide an effective solution.
Asset Class Selection
The second reason to choose a custom approach is to incorporate different asset classes such as company stock or annuities. We include defined benefit (DB) plans and Social Security benefits in this category, as they are essentially equivalent to a fixed income investment that pays a steady coupon. Likewise, a retirement income solution is essentially a new asset class (an annuity) that is added to the glidepath.
DB payments change the profile of the fixed income allocation for defined contribution (DC) participants in two ways:
- A DB payment means that participants hold more fixed income in their portfolios than a target date participant without a DB plan, and
- Most DB plans pay a fixed, nominal amount, so the real value of the benefit will decline over time with inflation.
As a result, sponsors can customize a glidepath for a plan with a DB benefit by reducing the allocation to fixed income and increasing the allocation to inflation protection. Consider the following chart, which illustrates a custom glidepath for a sponsor with a DB plan. The custom plan includes more equities to balance the low risk income coming from the DB plan.