A Deeper Look at Target Date Investing

BlackRock’s target date fund (“TDF”) approach is built on their depth of expertise, innovative solutions and strategic plan design. Stacey Tovrov, Head of Investment Strategy on BlackRock’s Retirement Solutions Team, and Christopher Chung, CFA, Head of Asset Allocation and Custom Strategies for LifePath® discuss more.

Q: What are some key questions plan sponsors should be asking their asset managers about their TDF strategy?

Stacey Tovrov: In making decisions around TDFs, we strongly believe that plan sponsors need to start with an evaluation of the investment objective.

After confirming the objective, sponsors should make sure the managers are thinking holistically from both an accumulation and decumulation standpoint. Ultimately, we believe both considerations should be reflected not only in the strategy objective but also in the investment process and philosophy, and how those portfolios are then built.

Of course, risk management is also a critical piece. Other important questions would be, how are the managers overseeing and monitoring their strategies? How do they measure success?

Q: To address these factors, BlackRock strongly grounds their TDF strategy in lifecycle research.

Stacey Tovrov: Our lifecycle research is the foundation of what we do and one of our biggest value-adds to our clients.

Our approach allows us to understand how lifecycle investing is different from other asset allocation strategies. We address a multi-period investment problem in which we’re looking to convert a limited amount of income earned during a career into savings that help sustain spending across a lifetime.

We use real-world income data and complement that with financial analytical tools and empirical observations to more deeply understand how income and spending habits evolve. We want to know when they rise, peak, and decline.

We also factor in behavioral considerations, knowing that individuals don’t always make perfect decisions. We need to think about the differences between how a younger person may react to certain market environments versus someone nearing retirement.

Once we understand how those demographic components influence an individual’s ability to earn, spend, and save, then we can construct diversified portfolios to achieve the desired funding objective.

Christopher ChungBlackRock’s approach is grounded in academic rigor that combines behavioral considerations with sophisticated financial modeling, and that’s another differentiator in how we build TDF strategies. 

We use research, sophisticated modeling, and state-of-the-art thinking to deliver a practical solution that is simple and palatable to both plan sponsors and participants.

Q: What role does the LifePath Index play in an effective investing strategy for many retirement plan sponsors and participants?

Christopher Chung: LifePath does a great job of accounting for varying age-specific risks across both the accumulation and decumulation phases. These are risks associated with changes in human capital, market, inflation, sequencing, and longevity – and they don’t all have equal importance to your retirement success at every stage of your life. LifePath accounts for these risks in its framework, and it stands up in its actual real-world performance.

Stacey Tovrov: LifePath Index is the most cost-effective way to access our best thinking from both a glidepath design and asset allocation perspective. It’s differentiated from other products on the market in several ways.

For example, the LifePath design takes an overweight position in growth assets for younger individuals, relative to many of our peers’ strategies. This approach is grounded by our understanding of human capital, or the present value of future earning potential. Human capital is greatest when young, as individuals can reasonably expect to continue earning paychecks for multiple decades. Given the increased risk tolerance this consistency affords, we believe it’s important for younger individuals to maximize the equity risk premia when they have the most human capital to diversify market risk and volatility.

On the flip side, downside protection is most critical as individuals approach retirement, at which time we focus on high-quality fixed income and a more conservative equity allocation. Our ability to preserve investment balances during periods of volatility for these individuals is another key differentiator of our LifePath index strategy, relative to peers. We last saw this play out in Q1 of 2020, during the COVID-19 related sell-off.

We have an acronym for LifePath’s principles, GPS. It stands for, Growth when young, Protection around the point of retirement, and then Stability in spending in retirement. Our strategy is designed to achieve those goals for all individuals on their path to retirement.

Q: The current inflationary period is a new experience for many sponsors and participants. How does BlackRock’s approach to inflation hedging in TDF investing differ from other asset managers?

Stacey Tovrov: The LifePath Index strategy is designed to be resilient during all market cycles and accounts for inflation in both our glidepath design and strategic asset allocation.

In 2019, Chris and his team undertook a significant research initiative to determine how much inflation protection an individual needs in a lifecycle framework. The team sought to design the optimal inflation-hedging asset class sleeve and to understand how large an allocation individuals should hold based on their distance to retirement.       

Their research found that younger individuals with long investment time horizons need less inflation protection than many peer strategies provide, as wages have typically outpaced inflation. This conclusion allowed us to enhance our LifePath model, optimizing allocations to inflation-hedging real assets across the glidepath.

Compared to peers, our approach to inflation hedging differs in that we’re thinking about it from the perspective of how much inflation protection an individual should have at each point in their life to meet that consistent spending objective in retirement. Our peers look at inflation from a more traditional standpoint of asset allocation and portfolio construction.

Christopher Chung

Christopher Chung: In many instances, as Stacey said, other providers in the marketplace think about inflation from asset allocation perspective. Do we have exposure to inflation-sensitive vehicles in our portfolio? And what should the weight to those be? That is typically how they cast the problem.

In looking at inflation through the objective of LifePath, with the goal of having consistent consumption in retirement, we’re solving for the necessary amount of inflation sensitivity to have in your portfolio at a much more fundamental level. Our approach accounts for age-appropriate risks because positioning your portfolio in advance of inflationary periods is important.

There’s an opportunity cost for holding inflation-sensitive asset classes and non-inflationary periods, right? In theory, if they’re supposed to perform better in inflationary periods, they can’t perform equally as well in non-inflationary periods. So we are very mindful of the opportunity cost associated with holding these. This is why that age-specific aspect of the problem becomes much more critical than a single-period asset allocation view, which makes it far more difficult to get it right.

Q: What are the most important takeaways for institutional investors in BlackRock’s most recent research on fixed income?

Stacey Tovrov: Our latest research initiative builds upon that recent inflation hedging work by looking at fixed income through the same lifecycle framework.We evaluated our fixed income allocation beyond just risk-adjusted return to better align our fixed income allocation to our lifecycle objectives. Specifically, we wanted to understand how much credit and duration exposure an individual should hold during different stages of life.

Our research found that varying allocations within our U.S. Aggregate bond exposure, based on where an individual is in their lifecycle, can have a positive impact. It allows us to provide more growth-seeking fixed income exposure when individuals are younger, and more stability and equity diversification in periods of market stress around retirement.

This aligns with the unique approach BlackRock takes to LifePath’s construction, with our focus on stable and consistent spending throughout retirement. Everything we do seeks to achieve those “GPS” goals of growth, protection, and stable funding.

Learn more about target date investing strategies for retirement plans.

+The LifePath Funds may be offered as mutual funds. You should consider the investment objectives, risks, charges and expenses of each fund carefully before investing. The prospectuses and, if available, the summary prospectuses contain this and other information about the funds, and are available, along with information on other BlackRock funds, by calling 800-882-0052 or from your financial professional. The prospectuses and, if available, the summary prospectuses should be read carefully before investing.

LifePath target date funds are invested mainly in U.S. and global stocks early on, shifting to more conservative investments, such as bonds, as investors get closer to retirement. The target date in the name of the fund designates the approximate year in which an investor plans to start withdrawing money. Typically, the strategic asset mix in each portfolio systematically rebalances at varying intervals and becomes more conservative (less equity exposure) over time as investors move closer to the target date. Investment in the funds is subject to the risks of the underlying funds. The principal value of the funds is not guaranteed at any time, including at and after the target date.

None of the information constitutes a recommendation by BlackRock, or an offer to sell, or a solicitation of any offer to buy or sell any securities, product or service. The information is not intended to provide investment advice. BlackRock does not guarantee the suitability of potential value of any particular investment. The information contained herein may not be relied upon by you in evaluation the merits of investing in any investment.

This material is provided for educational purposes only and should not be construed as research. The information presented is not a complete analysis of the global retirement landscape. The opinions expressed herein are subject to change at any time due to changes in the market, the economic or regulatory environment or for other reasons. The material does not constitute investment, legal, tax or other advice and is not to be relied on in making an investment or other decision.

Investing involves risk, including possible loss of principal. Asset allocation models and diversification do not promise any level of performance or guarantee against loss of principal. Investment in target date funds is subject to the risks of the underlying funds. The target date is the approximate date when investors plan to start withdrawing their money. The blend of investments in each portfolio is determined by an asset allocation process that seeks to maximize assets based on an investor’s investment time horizon and tolerance for risk. Typically, the strategic asset mix in each portfolio systematically rebalances at varying intervals and becomes more conservative (with less equity exposure) over time as investors move closer to the target date. The principal value of a fund is not guaranteed at any time, including at and after the target date.

The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock, Inc. and/or its subsidiaries (together, “BlackRock”) to be reliable. No representation is made that this information is accurate or complete. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

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Prepared by BlackRock Investments, LLC, member FINRA

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