There are three pdf files posted on the topics of target date fund and glide path. Write 2 to 1 and -half pages (single space) paper describing what is a target date fund, what is glide path, and wha

A s TDFs continue to grow and compete for investors, their management is taking a closer look at the funds’ glide paths.

Experts say the old rules of retirement and investing no longer stand in a world of lower bond rates and longer life spans.

Increasing life expectancy along with chang ing markets have many managers increasing their exposure to equities. Longer Lives, Changing Market Conditions One of the most important aspects of a target- date fund is the asset allocation and glide path. The glide path is the rate at which the fund shifts money from equities into bonds as the in ves - tor nears the target retirement date. Glide paths can vary dramatically, but the mix typically ranges from a 90/10 equity/bond split early in a TDF’s life to a 30/70 equity/bond split in the target retirement year. The problem is the old rules of thumb about asset allocation are quickly becoming outdated because of increasing life expectancy and changing market expec- tations. If people are going to live longer and bond yields are going to be lower, investors need to hold more in equities during their life to avoid outliving their money.

It’s no surprise that TDFs are frequently changing their glide paths and allocations to adjust to changing market conditions and retirement expectations. According to the Society of Actuaries, a 45-year-old male currently has a 38 percent chance of living until at least age 85. For a woman of the same age, that prob abil - ity rises to 49 percent. Most investors should be plan ning for a 30-year retirement, if not longer. “It’s changing the way (investors) think about things,” says Mari Adam, president of Adam Financial Associates in Boca Raton, Fla. “There’s no right answer, but we do know if you go (too much) into bonds too early, you’re not going to get a sufficient rate of return to make your money last.” The 2014 Merrill Lynch report “Health and Retire ment:Planning for the Great Unknown” says health and lon gev - ity may be the big retirement wild card. It found that longevity places a double threat against retirement. First is the risk that people may outlive their money; this longevity also could lead to higher health care costs and increase the potential for long-term care. Second is the risk that unexpected early retirement owing to health problems will reduce earning years and savings poten- tial. Compounding that threat is the continued rise in health care costs above the rate of inf lation. Glide Paths a Critical Part of Long-Term Performance Most TDFs are adjusting their glide paths to meet these changes. Morn - ingstar analyst Jeff Holt says some fund managers have been placing more emphasis on not only market risks but also longevity risks.

More aggressive TDF man- agers such as T. Rowe Price specifically state increasing life expectancy as a primary reason for adjusting their glide paths, he says. In June 2014, Black Rock increased the equity alloca - tions in its LifePath Index TDFs to account for longevity. Under the previous allo- cation, BlackRock held investors fully in equities when they’re 45 years from retirement with a gradual shift to 38 percent in equities at the landing point. The new allo- cation maintains 100 percent in equities until 30 years from retirement. “It’s very common for (fund managers) to revisit their assumptions and glide paths and adjust them accord - ingly,” Holt says. “Longevity is playing more of a role in that.” A 2014 report from Vanguard, “Target-Date Funds:

Looking Beyond the Glide Path in 2014,” found that a target-date fund’s glide path and how it changes over time is a critical determinant in outcomes for investors. It compared glide paths of target-date funds for the five largest providers of TDF funds, representing 83 per- cent of all assets invested in TDFs. The report noted there was almost uniform agreement in asset allocations for younger investors. The variations in allocations were minimal for 2050 funds but grew larger for more near- term funds. Products Keep More Money in Stocks as Investors Increase Life Expectancy Target-Date Funds Adjust Their Glide Paths by Craig Guillot 33_34 Mutual Fund Matters_Dec14_33_34 10/15/14 11:12 AM Page 33 Various quantitative tools were used to test the adequacy of each path, with most paths deemed ade- quate to achieve retirement readiness for investors who saved consistently and invested with discipline over a 40-year career. The report noted that although such tools have limitations and can’t guarantee future success, the glide path may be less important than other elements. “Due diligence should go beyond funds’ glide paths and consider their historical and forward- looking sta bil - ity,” the report said. The Vanguard report also noted that more TDF providers are adjust- ing glide paths on a tactical basis designed to benefit from a perceived shorter-term opportunity in the mar - ket place. These adjustments receive little attention, but they can signif - icantly change the resulting allo ca - tions in the long term. Glide Paths Can Vary Dramatically Variations in glide paths can vary widely among some target-date funds, Adam says. In many cases, the percentage of equities can vary by more than 10 percent in some periods. Consider the case of the TIAA-CREF Lifecycle 2040 Retire - ment Fund (ticker: TCLOX) and the JPMorgan SmartRetirement 2040 Fund (SMTSX). The JPMorgan fund cur- rently holds 77 percent in equities, while the TIAA-CREF fund holds 90 percent in equities. (Funds are men tioned only for educa tional purposes. No investment recommen - dations are intended.) By the target retirement date of 2040, the JPMorgan fund will hold only 35 percent in stocks while the TIAA-CREF will hold 50 percent. Both funds have shown comparable per- formance, but a 15 percent variation in allocations and the glide path could have a big impact over time.

Some advisers say too conservative of a glide path could hamper an in ves - tor’s retirement. “Even in retirement, I never like to see anyone with less than 40 per- cent in equities. You won’t even keep up with inf lation and your portfolio isn’t going to last. Not in this environment,” Adam says.

Joe Tomlinson, managing director of Tomlinson Financial Planning in Greenville, Maine, wrote a paper for the Advisor Perspectives newsletter in 2013 about why higher equity allocations work in TDFs. Even factoring in the poor per- formance of TDFs in 2008, current or near retirees would have done better with TDFs in more aggressive stock allocations than in conserva- tive ones. The rule of thumb that stock allo- cations should decline dramatically with age doesn’t hold up relative to other strategies because those rules were developed in an age of higher bond yields, Tomlinson says. His re - search confirms Bill Bengen’s data from the 1990s that found retirees with the best outcomes were those who had stock allocations in the 50 percent to 75 percent range.

Bengen, a financial adviser and author, formulated the 4 percent drawdown rule for pulling money out of retirement portfolios. “The glide path that achieves the best balance between positive and negative measures is the level 50 per - cent stock allocation,” Tom linson says. “It worked well with the 4 per- cent rule, which says you withdraw 4 percent in the first year then in - crease that by inf lation every year after that.” Change and More Change Adjustments to glide paths can be beneficial to investors, but changes should be infrequent and for the right reasons. “Bait and Switch: Glide Path Instability,” a 2011 report from Ibbotson, a Morningstar company, looked at the glide path stability of target-date funds. It found that the glide path the investor signed up for may not be the one received over time and that glide paths can “change dramatically over time, often with no explanation.” The report’s authors said that although glide path changes aren’t necessarily bad, investors should scrutinize funds that make unan- nounced, unjustified changes in glide paths. Morningstar developed a Glide Path Stability Score (GPSS) to track the stability and changes in TDFs.

A 2013 report showed that the top three fund families with highest GPS scores (meaning more stable glide paths) were T. Rowe Price Retirement, TIAA-CREF Lifecycle and John Hancock Retirement Living. Holt says changes in a glide path should be only one part in evaluating a fund. Because TDFs are often used by investors who want a hands-off approach to their investing, a more important task may be to select the right fund to begin with. It may be difficult to shop around in a defined-contribution plan, but it’s about finding the best available option and making regular invest- ments. Whether that option is aggres- sive or conservative, Holt says minor changes in fund glide paths over the years shouldn’t have a significant pos itive or negative effect on the in - tend ed outcome.

“You should be attentive to changes, but not overreact,” Holt says. “There should be understanding and reasoning behind those changes, and you should be confident that the manager is making the best decisions in the long term.” Websites of Interest Vanguard, “Target-Date Funds: Looking Beyond the Glide Path in 2014” https://pressroom.vanguard.com/content/ nonindexed/TDF_Glidepath_ 2014_4.11.2014.pdf Merrill Lynch, “Health and Retirement:

Planning for the Great Unknown” www.wealthmanagement.ml.com/pub- lish/content/application/pdf/GWMOL/ML WM_Health-and-Retirement-2014.pdf Ibbotson, “Bait and Switch: Glide Path Instability” https://corporate.morningstar.com/ib/doc- uments/MethodologyDocuments/IBBAsso ciates/Bait_and_Switch_Glide_Path_ Stability_Final_091211.pdf MUTUAL FUNDS | Mutual Fund Matters 34 | BetterInvesting | December 2014 ■ ■ ■ 33_34 Mutual Fund Matters_Dec14_33_34 10/15/14 11:16 AM Page 34