Coming Next to DC Plans: Personalized Target Date Funds

The leading strategy in defined contribution plans is ripe for a major upgrade.

The target date fund (TDF), the investment vehicle at the center of most Americans’ retirement savings plans, is getting an upgrade.

These funds, which dial down riskier allocations over a “glide path” as participants approach retirement, are hugely popular. They offer participants simple, low-cost and relatively easy access to professional and dynamic investment management.

TDFs got a big boost from the Pension Protection Act of 2006, which designated them as a qualified default investment alternative (QDIA). This allowed plan sponsors to auto-enroll employees into TDFs and auto-escalate contribution levels annually.

The result: TDFs attracted more than 60% of 401(k) contributions in 2021, driving up total assets to more than $3.5 trillion, according to Cerulli. They estimate nearly $4 trillion in TDF assets by the end of 2027.

Despite their success, TDFs are ripe for improvement. Today, the only factor used to select a participant’s TDF is the participant’s age. Other parameters – such as salary, wealth, and contribution rates – reflect national averages and don’t represent most individual plan participants accurately.

The next generation of TDFs will consider the unique attributes of each participant – not only age but also their balance, salary, and the percentage of compensation they and their employers contribute to the plan. The goal: an asset allocation better calibrated to the risk and return needs of individual participants.

Improving outcomes

Personalized TDFs are a natural next step for the industry. We believe they blend the best attributes of off-the-shelf and custom TDFs. Personalized TDFs should help improve retirement readiness by better aligning each participant’s unique risk and return objectives in an individualized portfolio. Indeed, PIMCO research shows that for most families, variables such as income and assets have significant asset allocation implications. Systematically incorporating these factors should enhance a dominant component of most Americans’ retirement toolkit.

Easy implementation

For plan sponsors, implementation is painless – it’s as simple as adding a traditional TDF to a plan menu. Benchmarking and due diligence of personalized TDFs are also straightforward because they are built using their corresponding off-the-shelf counterparts as building blocks. Sponsors can use the same benchmarking processes used for evaluating and monitoring traditional TDFs.

The advent of personalized TDFs stems from advances in technology, data, and analytics. Information readily available on recordkeeping platforms drives the personalization. The result is a simple, low-cost and enhanced “personalized” glide path for each DC participant in a plan.

PIMCO is an early mover in the personalized TDF arena, but we expect many in the industry will follow suit.

The Author

Jamie Bentley

National Retirement Sales Manager

Bransby Whitton

Product Strategist



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 on 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.

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.

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Inflation-linked bonds (ILBs) issued by the various governments around the world are fixed-income securities whose principal value is periodically adjusted according to the rate of inflation. Repayment upon maturity of the original principal as adjusted for inflation is guaranteed by the government that issues them. Neither the current market value of inflation-indexed bonds nor the value a portfolio that invests in ILBs is guaranteed, and either or both may fluctuate. ILBs decline in value when real interest rates rise. In certain interest rate environments, such as when real interest rates are rising faster than nominal interest rates, ILBs may experience greater losses than other fixed income securities with similar durations. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. Equities may decline in value due to both real and perceived general market, economic and industry conditions. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. 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.

There is no guarantee that the PIMCO glide path will work under all market conditions or is appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

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.

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