TDFs (and BFs) over the Life and Business Cycles by Mark J. Warshawsky, Ph.D. DCIIA October 9, 2013

TDFs (and BFs) Have Grown Popular They (and managed accounts) got a big boost from QDIA regulation issued by DOL owing to PPA of 2006 According to ICI/EBRI study, in 2011, retirement plan investors in their 20s invested 31 percent of their assets in TDFs and 11 percent in BFs; among those in their 60s, comparable stats are 11 and 7 percent; this is evidence of a cohort effect TDF assets represented 13 percent of all 401(k) assets in 2011, up from 5 percent in 2006 In 2011, 72 percent of 401(k) plans offered TDFs, up from 57 percent in 2006 About 39 percent of participants held at least some of their plan assets in TDFs in 2011, up from 19 percent in 2006

Recent Trends in Asset Allocations in Retirement Accounts, TDFs, and BFs Asset Allocations in Retirement Accounts, per the Fed’s SCF – In 2007, no noticeable relationship exists between age and equity allocation, many investors are at extremes, particularly of nearly all equity – In 2010, movement away from extremes, somewhat overall lower allocation to equity, and a discernible age pattern is now evident TDFs, per my recent BNA article – For young investors (age 23), in 2013, initial allocations to equity are high, generally above 90 percent; this has not changed since 2005 and holds for most fund families – For middle age investors (48), initial allocations to equity range from 64 to 83 percent; the overall allocation is a bit lower than earlier – For older investors (58), the equity share ranges even more widely – from 45 to 70 percent; again a bit lower than in past – Most dramatically, the ending equity share (at age 65 for income funds) has shifted much lower -- now ranging from 15 to 35 percent, compared to 35 to 60 percent in 2009 – This change may owe, at least in part, from the intense media attention and government hearings given to losses by older investors approaching retirement in 2008 – Overall, the dispersion of glide paths has narrowed somewhat Balanced Funds – Equity allocation at 65 percent for moderate risk allocation and 40 percent for conservative allocation – These shares have not changed over the business cycle

Focus on TDF Income Funds and Retirement Income Strategies Other recent significant changes in TDF income funds – Some fund families have a heavy allocation to bonds (80 percent) while others are lower (55 percent) – Some fund families have no allocation to cash, while other are higher (10 percent) – Overall, since 2009, the allocation has moved from cash to bonds – These changes (also lower equity share) are somewhat consistent with the “to” rather than the “through” view, but are the bonds long enough duration to hedge immediate life annuity purchases? Retirement Income Strategies (see my 2012 MIT Press book) – “Through” is a reasonable income strategy, but current income funds have moved away from this approach – “To” is also reasonable, if bonds are well matched and immediate annuities are purchased but neither are likely – Alternative approach is a combination of systematic withdrawals from an increasing equity share portfolio, combined with laddered purchases of immediate life annuities. – My research shows that this alternative approach has good income production properties and relatively low risk; it can be optimized for individual retirees based on their preferences and circumstances