Investors can accumulate greater wealth in 90 percent of potential macroeconomic scenarios when investing in target-date retirement strategies that employ a “through” glide path, Fidelity said in its own paper, titled, “Achieving Retirement Success: Do ‘To or ‘Through’ Glide Paths Lead to Higher Wealth?”
“To” funds, of course, are those with a managed roll down of equity only until the day of retirement, after which the asset allocation remains static, while the equity allocation in “through” funds continues to diminish beyond retirement.
The additional wealth, or “wealth buffer,” created in a “through” glide path may help reduce a key risk of retirement investing: running out of money in retirement, Fidelity said.
Fidelity said it conducted an in-depth analysis, using market data over the last 114 years and thousands of market simulations, to compare the two strategies.
“There is no doubt Americans are living longer, and, as such, they are likely to spend 20 or 30 plus years living in retirement,” said Andrew Dierdorf, co-portfolio manager of Fidelity Investments’ target-date strategies unit.
“We, therefore, strongly believe that to better help investors achieve their retirement income goals, target-date strategies should not simply focus on getting investors to retirement, but through retirement.”
Fidelity’s analysis also showed that the “wealth buffer” can help investors preserve capital during equity market declines.
“Investors’ ability to have adequate income replacement throughout retirement is greatly affected by various hurdles, including rising health care costs, longevity and inflation,” said Mathew Jensen, director of Fidelity’s target date strategies.
“As a pioneer in the concept of target date fund investing, Fidelity believes that a target date investment strategy that considers the investors’ lifetime savings and income needs will help improve their likelihood of retirement success.”
For its part, BlackRock said its position is that a persuasive common-sense case can be made for the “to” fund approach “based on an understanding of human capital, or the ability to earn income, which is depleted at retirement, and retirement risk, which we argue is at its highest level the day retirement begins.”
“It is hard to find a rationale for taking more risk on the retirement date,” it concluded.