Text on screen: PIMCO

Text on screen: Vidur Mehra, Defined Contribution Specialist

Vidur: myTDF represents an evolution to traditional target date funds. By going beyond age and considering five demographic factors, myTDF seeks to deliver a more personalized default solution with the same ease as traditional target date funds.

FULL PAGE GRAPHIC: TITLE – Moving beyond age may lead to a more optimal asset allocation  Subtitle: SAMPLE 52-YEAR OLD TARGET DATE ASSET ALLOCATION

This bar chart shows a sample 52-year old asset allocation that compares fours factors for both myTDF and a single-factor TDF. The first column at left is age (5-year point); the allocations are as follows: stocks 79%; bonds 21%. The second column from the left is age (precise); the allocations are as follows: stocks 75%; bonds 25%. The third column from the left is 401(k) account balance. The allocations are as follows: stocks 80%; bonds 20%. The fourth column from the left is salary. The allocations are as follows: stocks 86%; bonds 14%. The last column is contribution. The allocations are as follows: stocks 85%; bonds 15%. There is a separate table that highlights the differences between Traditional and Personalized as follows. Age – Personalized–52; Traditional–50. 401(k) account balance –Personalized–$80,000; Traditional–$150,000. Salary –Personalized–$40,000; Traditional–$70,000. Contributions– Personalized–5%; Traditional–10%.

Let’s take a closer look at the five factors and how they impact allocations:

The first factor is age. Like traditional target date funds, myTDF reduces the allocation to equities as a participant grows older. However, while traditional target date funds rely on rounding the participant’s age to the nearest five year increment, myTDF uses the actual birth year to help determine more precisely where the participant should be located on the glidepath. In the example shown here, this 52-year-old participant would see their personalized equity allocation decrease by 4% relative to the off-the-shelf target date fund, which assumes a mid-point age of 50 within the 5-year age band.

The next factor considered is a participant’s account balance. This balance is part of a participant’s total financial wealth. Also included in financial wealth is the current value of their future Social Security benefits, which have bond-like characteristics. As such, when a participant’s account balance is lower than what’s assumed by traditional Target Date Funds, myTDF increases equity exposure in order to achieve the optimal stock/bond mix including the consideration of Social Security.

In this example, the participant’s balance is roughly half that of the national average assumed by traditional target date funds, resulting in a 5% increase in equities.

The third factor is salary. The treatment of salary is very similar to account balance and there is a strong relationship between a participant’s salary and their overall financial wealth. For this reason, myTDF targets a higher allocation to equities for those participants earning salaries below what’s assumed by traditional target dates. Again, this approach is seeking to optimize the stock/bond mix including accounting for Social Security.

For this sample participant who is earning $30k less than the traditional target dates, myTDF increases the equity exposure by 6%.

Let’s combine the fourth and fifth factors, contributions and employer match rates. When these contributions are lower than traditional target date assumptions, it means that fewer cash flows are coming into the participant’s retirement account. These regular cash flows can be thought of being similar to bond coupon payments. Therefore, scenarios with below average contribution rates result in reduced equity exposure, or higher fixed income exposure, in order to offset the lower bond-like exposure linked to contributions. As shown in the example participant, contributing at half the rate assumed by traditional target dates results in a 1% reduction in equity.

While I have described this process factor by factor, in practice this process is a single optimization where all factors are processed concurrently. In this example, these five personalized factors results in a meaningful shift in asset allocation, an increase in equities of 6%, relative to a traditional target date. Importantly, this process is run on a quarterly basis to help ensure that any changes are seamlessly reflected in an ongoing and timely manner.

By embracing technology and data that is already available to us on record keeping platforms, we believe we are able to deliver a more precise default solution to participants. With a majority of plans already including traditional target date funds, we believe personalized target dates are a natural next step in the evolution of the QDIA.

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Disclosure

Past performance is not a guarantee or a reliable indicator of future results.

PIMCO and myTDF® are trademarks of Allianz Asset Management of America LLC in the United States and throughout the world.

myTDF is offered by Pacific Investment Management Company LLC, a registered investment adviser, and is intended for citizens and legal residents of the United States and its territories. Investment advice generated by myTDF is based on information provided and limited to the investment options available in the defined contribution or defined benefit plan. Projections and other information regarding the likelihood of various retirement income and/or investment outcomes are hypothetical in nature, do not reflect actual results, and are not guarantees of future results. Results may vary with each use and over time. myTDF may be covered by one or more U.S. or international patents.

myTDF is a defined contribution or defined benefit plan solution that allows a plan participant to personalize their target date fund allocation across multiple vintages based on participant inputs using PIMCO proprietary funds.

No engagement is required on behalf of the participant when myTDF is the QDIA, and auto-enrollment is utilized.

There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.

Target Date Funds are designed to provide investors with a retirement solution tailored to the time when they expect to retire or plan to start withdrawing money (the “target date”). Target Date Funds will gradually shift their emphasis from more aggressive investments to more conservative ones based aon their target dates. Target Date Funds invest in other funds and instruments based on a long-term asset allocation glide path developed by PIMCO, and performance is subject to underlying investment weightings, which will change over time. An investment in a Target Date Fund does not eliminate the need for an investor to determine whether a Fund is appropriate for his or her financial situation. An investment in a Fund is not guaranteed. Investors may experience losses, including losses near, at, or after the target date, and there is no guarantee that a Fund will provide adequate income at and through retirement.

A Glide Path is the asset allocation within a Target Date Strategy (also known as a Lifecycle or Target Maturity strategy) that adjusts over time as the participant’s age increases and their time horizon to retirement shortens. The basis of the Glide Path is to reduce the portfolio risk as the participant’s time horizon decreases. Typically, younger participants with a longer time horizon to retirement have sufficient time to recover from market losses, their investment risk level is higher, and they are able to make larger contributions (depending on various factors such as salary, savings, account balance, etc.). Generally, older participants and eligible retirees have shorter time horizons to retirement and their investment risk level declines as preserving income wealth becomes more important.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the current opinions of the manager, and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2023, PIMCO

CMR2023-0525-2924803