Investment Management

Custom Target Date

Philosophy

We believe a custom-tailored target date series offers distinct advantages in balancing a plan’s long-term goals with real world constraints, reflecting plan-specific demographics, salary projections, industry characteristics and income replacement targets. Toward that end, we work through a multi-step, iterative process to customize the arrangement to suit each client’s total retirement benefits package.

Objective

A custom target-date suite allows plan sponsors to:

  • Tailor a glide path that is better aligned with an organization’s investment objectives and participant demographic profile
  • Assume more control over manager selection, plan operations and employee communications
  • Reduce overall plan expenses and leverage economies of scale from existing investment management relationships within existing benefit plans

Process

Based on participant and plan sponsor data, we work through a multi-step, iterative process to design a target-date series that complements each client's total retirement benefits package. Our goal is to help balance a plan’s long-term goals with real-world constraints, reflecting plan-specific demographics, salary projections, industry characteristics and income replacement targets.

We utilize a multi-step, iterative process to customize a target date series to each client's retirement benefits package. Our goal is to help balance a plan’s long-term goals with real-world constraints, reflecting plan-specific demographics, risk tolerance levels, salary projections, other benefit plans and industry characteristics. Within a custom mandate, we have the experience and flexibility to custom tailor a solution to meet each client’s stated needs and objectives around all aspects of target date design. Customized features can include asset allocation, glide path design, risk profile and decisions regarding underlying asset classes and fund options. We can also customize a target date solution using a client’s existing funds in the plan.

Rationale for Custom

A custom target-date suite allows plan sponsors to:

  • Tailor a glide path that is better aligned with an organization’s investment objectives and participants’ demographic profile
  • Assume more control over asset allocation, manager selection, plan operations and employee communications
  • Reduce overall plan expenses and leverage economies of scale from existing investment management relationships within existing benefit plans

Developing an Optimal Glide Path

We believe that the glide path design should align investment portfolio risk with the retirement objectives of plan participants. That means that the investment decision at every stage of the life cycle must incorporate a holistic perspective in which in-retirement objectives are driving the process. Our proprietary glide path model determines the relative allocation to equities and fixed income by connecting this portfolio risk with the income replacement risk. As result, our model is dependent upon the equilibrium return and risk characteristics of the equity and fixed income asset classes. It also incorporates labor income and pension benefits, as those factors will impact optimal investment choices.

Our approach to developing an optimal glide path for target date funds entails four steps:

1. Defining the inputs
2. Modeling the glide paths
3. Analyzing the glide paths
4. Selecting the glide path or paths

For a custom glide path design, we utilize a highly interactive process involving the plan sponsor and their consultant. Given the impact that the various inputs can have on the glide path design, the first step in the process warrants an interactive approach in which the plan sponsor can confirm the appropriateness of the inputs. Furthermore, during the selection phase the plan sponsor can evaluate whether the glide paths can meet the set objectives.

In creating the optimal glide path for our clients, we offer two proprietary services:

  • For each plan, we construct a Voya Labor Income Profile™ based on a plan’s participant demographics. The Voya Labor Income Profile™ which is the projected distribution of a participant base’s future income and is broken down into three main components:
    • Average real labor income of plan participants throughout their careers
    • Uncertainty around the expected level of real labor income
    • Correlation of income uncertainty with equity market returns
  • All three of these components can impact the glide path. As such, if the Voya Labor Income Profile™ for a plan’s participants varies significantly from the “average” characteristics of a typical plan in one or more of these components, a custom glide path may be warranted. Below please find a comparison of a plan that has a steeper income path than an “average” plan.

Voya Labor Income ProfileTM

We also create the Voya Income Replacement Ratio Efficient Frontier™ for each client based on their unique Voya Labor Income Profile™ to help plan sponsors examine the risk and reward tradeoffs of different glide paths at the assumed retirement age. This framework is based on the belief that a glide path should optimally balance the expected income replacement ratio (IRR)1 at retirement with the risk of ending up with a very low IRR (i.e., shortfall risk). We define the glide path’s risk as the worst IRR outcomes2 and its reward as the median IRR outcomes. As each glide path within this framework is plotted, an efficient frontier is formed based on different risk tolerance levels. At this point, we work closely with our clients to select a glide path that best reflects the appropriate risk tolerance levels for their plan participants.

Below is an example of this glide path evaluation framework.

Voya Income Replacement Ratio Efficient FrontierTM

For more detailed information, please see our whitepaper entitled, “Rethinking Glide Path Design- A Holistic Approach”.  (Note, we should also have a Custom Brochure posted here as well)

For more detailed information, please see our whitepaper entitled, “Rethinking Glide Path Design- A Holistic Approach”. (Note, we should also have a Custom Brochure posted here as well)

1IRR is defined as the income from the retirement plan at retirement as a percentage of the last earned salary.
2“Worst IRR outcomes” is defined as the expected shortfall for the worst 5% of possible IRR outcomes as calculated using the conditional value at risk (CVaR) approach.


Principal Risks

All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield inherent in investing. Price volatility, liquidity and other risks accompany an investment in equity securities of foreign, smaller capitalized companies. International investing does pose special risks including currency fluctuation, economic and political risks not found in investments that are solely domestic. Risks of foreign investing are generally intensified for investments in emerging markets..
Top