PIMCO | Real RetirementTM Target Date

Real Retirement^TM Target Date

What are RealRetirement Strategies?
RealRetirement Strategies are client-tailored target date portfolios that dynamically manage various asset class exposures to help balance risk and return as the portfolios move toward investors’ expected retirement dates. RealRetirement Strategies are differentiated by target retirement dates (e.g. 2010, 2020, 2030, 2040, and 2050). The portfolios combine PIMCO’s risk management strategies across asset classes, our long-standing experience in inflation-hedging Real Return investments, and our approach of highly diversified long-term investing.

With the U.S. retirement system undergoing fundamental changes, individuals increasingly face the burden of saving and investing for their own retirement. We believe the key to a successful investment outcome is choosing an asset allocation that delivers acceptable returns while also helping to protect against two critical risks: inflation and financial market downturns. PIMCO’s RealRetirement Strategies are designed to maximize growth in the inflation-adjusted purchasing power of retirement savings and to minimize the chance that a retiree will face a bad outcome due to financial market volatility.

RealRetirement differs from many first generation target date portfolios primarily by adding broader asset diversification and reducing exposure to equities. Although equities can play an important role in generating attractive long-term returns, an overemphasis on equities has often left investors with highly concentrated risk, even as they approach their retirement date – the point at which they are least able to tolerate a market downturn. In contrast, RealRetirement diversifies across asset classes, incorporating real assets (inflation-linked bonds, real estate and commodities) in addition to equities and fixed income, to help provide a well-rounded asset allocation aimed at mitigating the effects of inflation and market volatility as individuals save toward their retirement.

RealRetirement Glide Path: Getting the Asset Allocation Right

We believe the key to successful retirement investing is developing an asset allocation “glide path” that provides the proper mix of risk, capital preservation and diversification as individuals move toward retirement. The potential benefit of PIMCO’s approach is that it explicitly focuses on increasing individuals’ probability of achieving adequate replacement income in retirement, net of the effects of inflation. In the context of a defined contribution (DC) plan, this means more participants may expect a final outcome that is near the median, with potentially fewer participants failing to achieve their retirement savings goal.

What is Real Return?

Investors should focus on “real” returns, that is returns in excess of inflation. The future spending needs of individuals can be thought of as a future spending “liability,” the size of which grows with inflation. Why? Inflation is simply a measurement of the change in price of goods and services that we consume, including things such as food, housing, oil and gas, transportation, clothing, recreation and medical services. Therefore, it is critical that investors grow their savings at a rate that both tracks and exceeds inflation, so that investors not only increase the dollar value of their savings, but, more importantly, increase the inflation-adjusted purchasing power of their savings.

PIMCO is one the leading providers of Real Return investments, which incorporate real assets that have a positive correlation to inflation. These assets diversify traditional stock and bond holdings, which historically have not performed well in higher inflationary environments. The key real assets we focus on are:

U.S. Treasury Inflation Protected Securities (TIPS) as well as global inflation-linked securities
Commodities, which historically have provided both diversification and inflation hedging
Real Estate, with a focus on securitized real estate

PIMCO is a pioneer in analyzing global inflation-indexed securities, and offered one of the first commingled funds focused on U.S. TIPS. PIMCO also has a large and long-standing presence in commodities as one of the world’s largest managers of commodity index mandates. Real Return assets are important to the objective of maximizing real return while seeking preservation of a portfolio’s real capital.

Potential Benefits of RealRetirement

For Defined Contribution (DC) Plans:
RealRetirement offers our clients packaged target date solutions which tap into PIMCO’s strength in Real Return investing, as well as our expertise in optimally managing asset allocation to best match future liabilities, particularly for retirement.

PIMCO’s strong emphasis on risk management aims at ensuring that the success of retirement investors is not simply a function of financial market cycles. While some risk-oriented strategies may benefit investors who retire during bull markets, they may also disappoint investors who retire in bear markets; RealRetirement seeks to achieve acceptable retirement income goals for the maximum number of retirees over a range of economic scenarios – both bull and bear markets.

For many DC plan sponsors, The RealRetirement target date package offering may be a more efficient or cost-effective means of offering target date strategies than building their own custom strategies. This is particularly relevant for DC Plans without the size or resources needed to manage custom target date portfolios.

For DC Plan Participants:
For today’s workers, the importance of DC plans as a primary source of retirement savings is growing as the benefits offered by defined benefit pensions and Social Security increasingly fall short of retirement income needs. Under this new paradigm, replacing the income historically provided by Social Security and Defined Benefits (DB) plans will be critical to helping achieve retirement savings goals.

While some investors may have the sophistication to determine a personal asset allocation that can meet their retirement goals, the vast majority of DC participants may benefit from a professionally managed solution that is designed to help build adequate and sustainable retirement income. We believe the key to picking a proper target date strategy is to choose an approach and investment manager that is most likely to help your plan meet its primary objective. For most plans, the primary objective is to facilitate adequate retirement income replacement. To help achieve that goal, it is critical that the approach helps reduce the risk of bad outcomes and tightens the distribution of all outcomes – in other words, the investment approach needs to help plan participants reach an acceptable level of replacement income. RealRetirement seeks to address these concerns by combining PIMCO’s experience in offering proven risk management, Real Return investment solutions and asset allocation expertise.

The Regulatory Environment and Target Date Strategies

As a customizable target date strategy, RealRetirement is an ideal default strategy for DC plans. The Pension Protection Act of 2006 supports automatic programs using a qualified default investment alternative (QDIA) which includes target date strategies like RealRetirement. Stable value or money market strategies, which had long been the most prevalent defaults, have been virtually left out of the definition of a QDIA.

Investment Process for RealRetirement

Optimal asset allocation in RealRetirement target date strategies is carried out primarily through proportional investments in a range of PIMCO’s actively managed portfolios. This leverages PIMCO’s rigorous top-down and bottom-up investment process and track record in managing a full range of global asset classes, including equities, fixed income and Real Return strategies. As an extension of PIMCO’s active management style, RealRetirement portfolio managers may also employ tactical overweights and underweights in certain asset classes where value is identified, based on PIMCO’s cyclical and secular views of the market.

Risk Management / Controls

As with all of PIMCO’s specialized strategies, RealRetirement is managed using our core investment philosophies and within the general portfolio guidelines established by our investment committee. The RealRetirement strategy is always managed with a focus on the established glide path, and any variance from the stated glide path is executed in compliance with guidelines that control the expected tracking error.

Is RealRetirement Right for Your DC Plan?

RealRetirement target date strategies are a direct extension of PIMCO’s DC Practice which supports our clients and the consulting community as they evaluate various asset allocation approaches, including the creation of custom target date strategies. PIMCO’s DC Practice is dedicated to promoting effective DC plan design and innovative retirement solutions. Our team is pleased to support our clients and the broader community by sharing ideas and developments in DC plans in the hope of helping employees of corporations, not-for-profits, governments and other organizations achieve their retirement savings goals.

If you have questions about RealRetirement or PIMCO’s DC Practice, please contact PIMCO’s DC Practice at (888) 845-5012 or email us at pimcodcpractice@pimco.com.

How To Invest

Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Target Date strategies were designed to provide investors with a comprehensive retirement solution tailored to the time when they expect to retire and plan to start withdrawing money (the "target date"). Each strategy follows a target asset allocation schedule that changes over time to help reduce portfolio risk, increasing its exposure to conservative investments as the target date approaches. The principal value is not guaranteed at any time, including the target date. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk. Inflation-linked bonds (ILBs) issued by a government are fixed-income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. Government. Sovereign securities are generally backed by the issuing government, obligations of U.S. Government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. Government; portfolios that invest in such securities are not guaranteed and will fluctuate in value. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be suitable for all investors. The value of real estate and portfolios that invest in real estate may fluctuate due to: losses from casualty or condemnation, changes in local and general economic conditions, supply and demand, interest rates, property tax rates, regulatory limitations on rents, zoning laws, and operating expenses. PIMCO strategies utilize derivatives which may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. There is no guarantee that these investment strategies will work under all market conditions and each investor should evaluate their ability to invest for a long-term especially during periods of downturn in the market.

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