Implementing LDI with swaptions - Russell Investments

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STRATEGY TIMING IMPLEMENTATION Q&A The evolution of target date investing With Josh Cohen, Defined Contribution Practice Leader Josh Cohen Target date funds are relatively new. Is there evidence that they are actually helping participants avoid some of the pitfalls of investing? Yes. Before the creation of target date funds, many defined contribution (DC) plan participants struggled with poor diversification—many invested too much in company stock, for example. Participants also struggled with making investment choices appropriate for their ages, such as not taking on enough investment risk in their younger years. By their design, target date funds automatically resolve the issues of age-appropriate investing and diversification. Since the original creation of target date funds, what developments have you seen in the marketplace? Target date funds really started as turnkey solutions for DC plan sponsors looking for diversified default options. After the Pension Protection Act of 2006, many plan sponsors embraced target date funds as qualified default investment alternatives (QDIAs). Plan sponsors and target date fund providers have recognized that specialization can improve outcomes. One development is the rise of “open architecture” funds that include a mix of best-in-class managers instead of a single proprietary manager. This approach could also allow some large plan sponsors to take greater control and create their own target date funds. Another target date fund development is the desire for broader diversification, including the addition of products most sponsors would not include as standalone DC plan options—for example, alternative investments such as commodities or infrastructure funds. Investors have felt the pain of market ups and downs. Research is showing that such additional diversification can help lessen fund volatility. If plans are big enough, we are seeing demand for high levels of target date fund customization based on unique plan demographics. What’s driving the continual evolution of target date funds? Greater awareness that participants are increasingly relying upon DC plans, particularly the plans’ QDIA, as their primary vehicle for retirement savings. In their desire to serve as good fiduciaries, plan sponsors are really aiming to choose target date solutions that fit the participants in their plans—and that desire is driving demand for open architecture, increased diversification and higher levels of customization. Russell Investments // Russell Communiqué p / 12
RUSSELL INVESTMENTS Q&A (continued) Exhibit 1: The evolution of target date investing Early stage Current Future Objective Turnkey solutions Increased diversification and customization New asset classes U.S. equity, international developed equity, U.S. aggregate bonds REITS, commodities, TIPS, emerging markets, infrastructure, high yield, tactical AA Focus on participant outcomes and retirement income Annuities, longduration bonds Managers Proprietary Open architecture Open architecture Glide paths Off-the-shelf Customization at plan level Customization at participant level How do you think target date funds will evolve in the future? I think everyone—plan sponsors, participants and fund providers—will be more focused on retirement income. Right now, many participants are asking, “What level of assets am I going to have in retirement?” However, as many of the baby boomers approach and enter into retirement, they’re starting to ask, “What will my level of income be during retirement?” It’s a different mind-set. A focus on retirement income also has implications for product design. If retirees are looking for regular income, purchasing life annuities could enhance their living standards relative to a systematic withdrawal program. Alternatively, long-duration bonds offer return potential similar to fixed annuities, but without the administrative complexity. Are there other trends on the way? Mass customization is also on the horizon. For example, two issues with target date funds are that they give advice based only on the factor of age and they don’t adapt to shifts in the markets. Using information in a recordkeeper database, providers could create custom target date strategies for each participant based not only on age, but also on income level, current savings rates, and coverage in other company-sponsored retirement plans. They could also adapt asset-allocation strategies in response to market events and changes in contributions. I believe these trends are ultimately focused on improving the financial security of retirees. As more people rely on DC plans and default options as the main source of retirement savings, creating solutions tailored to their needs becomes increasingly important. p / 13
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