Text on screen: Improving the Target Date Model: Five Factors That Go Beyond Averages
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Text on screen: Philip Chao, Founder & CEO, Nexus338
Chao: My name is Philip Chao. I'm the founder and I'm the CIO for a firm by the name of Nexus 338. When you look at target date fund, it's in the trillions of dollars now. And why is this so popular? Well, because it's easy, it's simple and everybody can understand it.
Text on screen: TITLE – Same but different; SUBTITLE – TDFs incorporate similar data types, but the level of granularity differs – from average to personalized; Table comparing traditional and personalized target-date funds, showing that traditional approaches rely on broad averages across participant data, while personalized TDFs use individualized inputs for factors like age, salary, balances, and contribution rates.
Everything is average. What does the average individual make? What is the average age within that, which we talked about five year increments. What's the average salary and so on and so forth.
But is it accurate? I don't believe it is. The idea is to take a target date series and unburden it by that average data and infuse individual data to make it alive, if you would.
That’s the whole idea, not perfection, but improvement.
So what are the five factors? One is your date of birth, two is your wage or salary. Three is the account value of the account size. Number four is how much you're deferring into the plan. And then number five is your employer contribution to the plan.
So we use that to project forward what the future outcome is likely to be. And are we on track to get there?
And that's the concept. And also over time, we adjust as your data change. We can more closely approximate where you are going and keep on track with you without you doing anything about it.
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Text on screen: PIMCO
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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, 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.
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