Russell Weighs in on Post-Retirement Target-Date Glide Paths

In its latest research, Russell Investments concluded that once a target-date fund reaches an individual's planned retirement date, it should have conservative allocations and a flat glide path to minimize risk and improve the potential for attaining financial security.

Russell’s research found that a 32% equity allocation at retirement gives over a 94% probability of preserving a nest egg if one assumes an annual withdrawal of 4% of the initial balance from retirement savings. A 60% equity allocation reduces the probability of preserving the nest egg to 88%, and an 80% allocation reduces the probability to 84%.  

“[A]t retirement, investors face a great risk of outliving their savings,” said Josh Cohen, defined contribution practice leader, in a press release. “We believe that a properly designed post-retirement glide path is flat and has a more conservative allocation to stocks in order to help more people meet or exceed their retirement income needs. At the end of the day financial security at and during retirement is paramount.” 

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Russell said it can demonstrate that for any given downward sloping glide path, it can create a flat one that its research indicates is better in terms of its risk and reward trade-off. Specifically, Russell said it can show that for any downward sloping glide path, any withdrawal policy, and any time horizon, there exists a flat glide path that either (1) provides greater expected wealth at the time horizon for the same risk of running out of money before death, or (2) provides lower risk of running out of money for the same expected wealth at the time horizon.  

Russell recommends examining the investment rationale for a sloping versus flat post-retirement glide path and questioning how aggressive those post-retirement allocations should be.  

“Russell believes, without regard to level of aggressiveness, that a flat glide path in retirement always makes sense relative to a sloping one because it is categorically better in terms of relative risk and reward tradeoff,” explained Cohen. “This belief marks Russell as a proponent of the ‘to’ approach, but the glide path we advocate is designed just as much to get a participant ‘through’ retirement as ‘to’ retirement, only in a well-planned and well-executed way. The whole pre- and post-retirement picture is more nuanced than ‘to’ and ‘through.'” 

The research report, “The date debate: Should target date fund glide paths be managed ‘to’ or ‘through’ retirement?,” can be accessed here.  

Court Gives Baxter 404(c) Protection in Stock-Drop Suit

A court cleared Baxter International of wrongdoing in connection with a 401(k) stock-drop lawsuit.

U.S. District Judge Joan B. Gottschall of the U.S. District Court for the Northern District of Illinois ruled that Baxter did not violate its Employee Retirement Income Security Act (ERISA) fiduciary duties by keeping company stock in the plan as its share price dropped over word the company was unable to meet its expected earnings goals.

Gottschall found that Baxter qualified for 404(c) safe harbor protection because the plan met the requirements set out in that ERISA section, including:

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  • provide for individual accounts
  • allow participants the opportunity to exercise control over their accounts
  • provide participants with the opportunity to choose from a broad range of investment alternatives
  • give participants sufficient information to make informed investment decisions
  • provide additional safeguards if the plan offers qualifying employer securities.

In her ruling, Gottschall rejected the plaintiff’s contention that the plan was not a 404(c) plan because the plan’s fiduciaries had never explicitly determined that the plan would qualify as such. Also, the court contended, Baxter satisfied 404(c) by providing plan participants with enough information to allow them to make informed decisions about their investment in Baxter stock.

In addition, the court disposed of the plaintiff’s contention that 404(c) would not save the defendants from liability with respect to his claim that the plan violated ERISA by acquiring and holding more than 10% of the plan assets in Baxter stock. The court found it was the participants, and not the Baxter defendants, who caused the plan to hold more than 10% of its assets in company stock because the investments were made by the participants.

The class action brought by Baxter employee David E. Rogers stems from Baxter’s announcement in July 2002 that it had inflated its expected earnings. The announcement caused Baxter’s stock price to drop (see “Appellate Court Allows Stock Drop Suit to Move Forward”).

The case is Rogers v. Baxter International Inc., N.D. Ill., No. 04 C 6476.

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