As more retirement experts voice concern over stasis in the design of target-date funds, one index provider is hoping to accelerate the next evolution in TDF design.

Standard & Poor’s Dow Jones Indices has rolled out its Shift To Retirement Income and Decumulation Index Series.

The STRIDE benchmark is designed to track the performance of TDFs that hedge against longevity and inflation risk by using Treasury Inflation Protection securities.

The impetus behind the new STRIDE Index Series was largely the result of a new TDF strategy recently unveiled by Dimensional Fund Advisors.

Though the Austin, Texas-based fund company has nearly $400 billion in assets under management, it only recently entered the TDF market.

Its Dimensional Target Date Retirement Income Fund series addresses market, inflation and interest rate risk with an aggressive allocation to TIPs, starting as early as 20 years prior to retirement age.

Ultimately, the funds deploy as much as 75 percent of a participant’s assets to TIPs, which rise in value with inflation, an advantage nominal fixed-income investments do not claim.

Phil Murphy, vice president of North American Equity Indices at Standard & Poor’s Dow Jones Indices, told BenefitsPro that the TIPs-laden glide paths in the DFA funds is a completely novel approach in the TDF space.

“Most people are conditioned in 401(k)s to monitor their account value,” said Murphy. “But that single-minded focus does not take into account interest rate risk.”

No one knows when or if interest rate will rise, reminds Murphy. But the prospect that they may could be an issue for the majority of TDF investors that will be heavily allocated in nominal, or normal fixed-income products as they enter retirement.

If interest rates do go up, investors are prone to the possibility that the yield on nominal fixed-income won’t be able to keep up with inflation. And that could add to the possibility that investors outlive their assets.

Murphy says DFA has applied a classic liability driven investment strategy, common in the defined benefit world, to the 401(k) world, the first asset manager to do so.

To date, TIPs have been “underappreciated” by plan participants and the general investing public, thinks Murphy.

While he cautions that there is no silver bullet in retirement planning, Murphy expects TIPs will play a more prominent role in TDF design going forward.

“There is no substitute for saving enough,” says Murphy. “But if savers are diligent over their working career, this is one strategy we think can lower the uncertainty around making income last throughout retirement.”

In rolling out a new series of benchmarks that tracks an LDI strategy, Murphy says Standard & Poor’s Dow Jones Indices is hoping other fund mangers will take notice of DFA’s strategy.

“We are hoping to play a role in what we see as the beginning of a new category of TDFs,” said Murphy.

“We want this to lead to a whole new area of competition in the asset management industry,” he said.

As for the competition in indexing the new strategy, Murphy says the more the merrier.

“Nothing would make me happier if Morningstar and Lipper were to roll out their own indices in this area,” said Murphy.

Instant Insights /

Aiming to accelerate the next evolution in TDF design

More From HR Executive

Related Stories

Recommended For You