Digging In to Diversification

The value of offering well-managed target-date funds for all markets.
From Left: Tom Hickey, Ben Richer

Target-date funds (TDFs) represent a well-established yet fast-growing market for retirement plan advisers and their sponsor clients. Alison Cooke Mintzer, editor-in-chief of PLANADVISER, spoke with Nationwide’s Thomas Hickey, head of asset strategies, and Benjamin Richer, director of asset strategies, about the role target-date programs can play in a well-diversified defined contribution (DC) portfolio and what plan advisers need to look for when considering these funds. As co-portfolio managers for Nationwide’s TDF offering and other multi-asset strategies, Hickey and Richer manage over $2 billion in TD assets and over $30 billion across all Nationwide funds. Combined, they bring over 40 years of investment experience to the funds they manage.

PA: Let’s start with the basics. What are some considerations for plan advisers looking for and evaluating target-date funds?

Hickey: From our perspective, even before reviewing performance or star ratings, we believe plan advisers should look at the reputation of the firm sponsoring the target-date program, as well as that firm’s history and commitment to retirement investing.

In addition, plan advisers should evaluate the design elements of the target-date program, including the glide path and whether or not it continues past the retirement date, the nature of the underlying investments, the breadth of the investment strategies and the funds’ expenses.

PA: When it comes to equity exposure at the fund’s target date, what should plan advisers be looking for, specifically?

Hickey: One important aspect is determining whether or not the adviser believes the plan participants would be more comfortable with a “to” versus a “through” glide path strategy. A “to” retirement date glide path tends to become more conservative more quickly as it moves toward the retirement date, then ceases to reduce equity exposure or increase fixed-income exposure. The net effect is that such “to” glide paths can leave investors falling short of their retirement goal, thereby putting participants’ future retirement income in jeopardy.

Conversely, the “through” approach positions the glide path to be more aggressive during the individual’s working career, providing a higher potential for return and also helping the participant avoid falling short of retirement savings at the end of his or her lifespan. Nationwide offers a “through” glide path, which will continue to reduce its equity exposure 20 years beyond the retirement date.

PA: Obviously, there are many risks to be considered when building a glide path. Which do you consider most important?

Richer: At Nationwide, we center on the client needs. For us, it’s about the risks our participants face as they plan for and live in retirement: inflationary risk, market risk, asset class concentration risk and interest-rate risk. Particularly within a retirement account, there’s also a sequence of returns risk, or the risk that a market event will occur immediately following or preceding a participant’s retirement date. From the participant’s standpoint, all those risks essentially boil down to longevity risk—the risk that you may run out of money before the end of your life.

PA: Understanding the risks in the creation of the glide path is a fundamental difference and differentiator for firms. Can you talk a little bit about your position on that and where advisers should be looking?

Richer: At the beginning of our glide path, when participants are youngest, Nationwide’s target-date funds tend to be more aggressive than most competitors in terms of our equity allocations. As the participants near their retirement date and extend beyond it, our glide path becomes more conservative than most. That’s one of the first ways we address some of these risks, longevity risk being the key risk there.

Through our glide path construction, Nationwide attempts to provide the potential to generate higher returns further out from participants’ retirement date, when they are typically less sensitized to market risk. As a participant gets closer to his or her retirement date, we believe it’s important to implement a more conservative investment strategy, so that if a market event were to occur closer to the retirement date, our glide path could provide a greater degree of protection than many of our more aggressive competitors.

Another way that Nationwide attempts to mitigate some of those risks—market risk and concentration risk, specifically—is through our breadth and depth of asset-class coverage. Our target-date funds invest in up to 13 asset classes, seven of which are nontraditional asset classes. Incorporating these nontraditional asset classes into our glide path helps to reduce the correlation of returns. This increased diversification can help reduce the risk that any one asset class will have a significant negative impact on the overall return of the portfolio, especially at or near a participant’s retirement date. So, let’s say there was a negative market event in the U.S. With our global and nontraditional asset class investment approach, we expect our broadly diversified portfolios to help cushion the impact on participant account values from such a negative market event.