A diversified target-date fund could beef up annual retirement income by 11 to 17 percent depending on market conditions, said Angela Antonelli, executive director of the Center for Retirement Initiatives, in a comment.
The researchers assumed that an employee would participate in a defined contribution plan for 40 years, between the ages of 25 and 65, with savings starting at 4 percent of wages initially and rising to 7.5 percent of wages by age 65, with an employer match of 50 percent on the first 6 percent of savings. Wages were assumed to increase at the rate of the Consumer Price Index plus 2 percent until the participant was 45 years old, and in line with CPI afterward.
The report’s authors also created a median glide path using a blend of different currently available target-date strategies, noted Markov.
“There’s other methods that could have been used to do this kind of analysis that might have produced different results, and that’s a caveat in reading an analysis like this,” says Schwartz. “Whether these numbers will end up being predictive and accurate, I can’t say.”
Vanguard’s View
In August 2017, Vanguard did its own research into the potential for alternatives in target-date funds using similar saving, spending, market and glide path assumptions, arguing that any asset class used in a target-date fund should be low-cost, simple, transparent and liquid. On that basis, the asset manager rejected the idea of using hedge funds, private equity or private real estate in target-date funds.
“As for liquid alternatives, target-date funds that incorporate them may offer access to strategies typically found within a hedge fund structure at a slightly reduced cost and with increased liquidity and transparency,” wrote Vanguard’s researchers. “However, liquid alternatives represent a diverse category of alternative strategies. Many of them are highly dependent on active management skill, and thus plan sponsors need to consistently select top managers. Because of this, we exclude liquid alternatives as a general category from further analysis.”
Instead, Vanguard focused on investments Markov’s researchers consider “traditional,” namely, REITs and commodities. Adding a 10 percent commodities allocation or a 10 percent overweight to REITs in a target-date product had, at best, a marginally positive impact on risk-adjusted returns and volatility.
Vanguard’s researchers did acknowledge that adding alternatives would require additional education for participants and plan sponsors. Vanguard also balked at the potential cost of including alternatives in target-date funds.
“Alternative investments generally have greater explicit costs in the form of higher fees, and studies that highlight their benefits without taking cost into account can be misleading,” wrote Vanguard’s researchers. “And, though admittedly more challenging to measure, there are additional implicit costs for sponsors, such as the time, energy and resources required to ensure due diligence manager oversight and additional participant education. These added costs, as well as the increased level of participant confusion, can offset any potential risk-return improvements in a glide path created by an alternative allocation.”