Through versus To: Underappreciated and misunderstood, yet a key decision influencing outcomes
This paper examines why ‘Through’ target date glide paths are more likely than ‘To’ glide paths to deliver higher accumulated wealth and more sustainable retirement income across a wide range of market environments.
Written by Bruno Weinberg Crocco, Portfolio Manager, Jon Knowles, Institutional Portfolio Manager, and Darren Zeng, Quantitative Analyst, from the Global Asset Allocation team.
The design of a target date strategy is determined largely by an investment manager’s fundamental belief as to whether a glide path should reach its most conservative allocation at a specified retirement date (“To” strategy) or if it should continue to evolve beyond the target date (“Through” strategy). Generally speaking, a To glide path is constructed in a way that has less exposure to growth investments in the later stages of a member’s accumulation journey, de-risking to a static allocation at the target date. This approach shortens the effective investment horizon for members. A Through glide path, on the other hand, tends to have more exposure to growth investments in the years around retirement. It also adopts a more gradual de-risking process, continuing to adjust beyond the target date.
In this paper, we provide a comprehensive assessment of the advantages and trade-offs of a glide path that has greater exposure to growth-oriented investments around the target date and continues to de-risk beyond it.
Highlights
- Our analysis shows that in 74% of simulated macroeconomic environments, the accumulated wealth at the target date (age 65) was higher with a Through glide path than with a To glide path.
- The advantage of Through glide paths is asymmetrical as it adds more years of income in retirement during normal and strong equity markets than it detracts during weak equity markets. As further proven in our research, the severe environments where the To glide path was marginally better, its advantage at the retirement date was modest, where in contrast, in normal to favourable market environments, Through’s advantage at the target date was significant.
- How or where plan members continue to invest their savings upon reaching their target date has no bearing on their decision of selecting a Through or To glide path
- Meaningful adjustments to the assumptions used in this analysis that modify contribution rates, retirement ages or wealth accumulation could reduce (but are unlikely to eliminate) the relative advantage Through glide paths offer in successfully replacing income throughout retirement.
- Through the lifecycle, our approach interacts with member preferences, needs and sensitivities in a way that better aligns with their long-term goals. As members near their target date, our age-appropriate investment design is well suited to match the unique and evolving risks Canadians face.
