Custom Target Date: Maximizing Retirement Readiness · TDFs can play an essential role in ensuring...

For financial professional use only. Not for inspection by, distribution or quotation to, the general public.

ING U.S. Investment Management will become Voya TM Investment Management in May 2014

Custom Target Date:

Maximizing Retirement

Readiness

ING U.S. Investment Management will become

Voya TM Investment Management in May 2014

Multi Asset Strategy and Solutions

ING U.S. Investment Management

For financial professional use only. Not for inspection by, distribution or quotation to, the general public.

ING U.S. Investment Management will become Voya TM Investment Management in May 2014

Custom Target Date:

Maximizing Retirement Readiness

ING U.S. IM Multi-Asset Strategies & Solutions

Presented by:

Pierre Couture, A.S.A., E.A., M.A.A.A. – SVP, Senior PM and Head of Customized Solutions

Paula Smith – Head of DCIO

Hugh Boyle – Institutional Sales and Relationship Management

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For financial professional or qualified institutional investor use only. Not for inspection by, distribution or quotation to, the general public.

File Name Goes Here

ING U.S. Investment Management will become VoyaTM Investment

Management in May 2014

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Agenda

1. Target Date Funds in a Retirement Plan

2. Bridging the Plan Sponsor Objective and Participant Demographics Gap

3. Designing the Glide Path with Participants in Mind

4. Conclusion

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1. Target Date Funds in a Retirement Plan

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Trends in the Target Date Industry

DOL guidance on Target Date Funds (TDFs) and greater fiduciary oversight has led to:

► Review of the plan’s QDIA

► Move to open architecture

► Increased interest in custom target date funds/glide paths

Downward pressure on fees has resulted in:

► Greater adoption of collective investment trusts

► Move from fully active to a blended active/passive approach

Rapid TDF growth within DC lineups due to:

► Overwhelming popularity as a QDIA

► Choice among investors who prefer TDF’s inherent simplicity

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The “Mainstreaming” of Target Date Funds

The comprehensive aspect of TDFs have a big impact on participant perception and

behavior:

TDF investors:

► Are significantly more confident about investing and in meeting their retirement goals

► Report higher contributions levels than non-TDF investors

– Greater confidence most likely leads to higher contribution percentages (>2% vs. non-TDF investors)

– More TDF investors contributed 10%+ of income than non-TDF investors (42% vs. 23%)

► Consider the convenience and built-in diversification benefits over performance

Based on ING U.S. Investment Management’s own research: “Participant Preferences in Target Date Funds: An Update: Examining

Perceptions and Expectations among Target Date Investors and Non-Investors” – an online survey of 1,017 employer-sponsored

participants from plans of all sizes in September 2013.

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The “Mainstreaming” of Target Date Funds

TDFs can play an essential role in ensuring retirement readiness. Sponsors should

consider TDFs that take into account the investment preferences of participants.

Participants prefer:

Wealth preservation rather than wealth growth, especially at or near retirement

Broad diversification among assets classes and investment manager

“To retirement” glide path

Based on ING U.S. Investment Management’s own research: “Participant Preferences in Target Date Funds: An Update:

Examining Perceptions and Expectations among Target Date Investors and Non-Investors” – an online survey of 1,017

employer-sponsored participants from plans of all sizes in September 2013.

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2. Bridging the Plan Sponsor Objective and

Participant Demographics Gap

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Bridging the Plan Sponsor Objective and Participant Demographics Gap

TDFs can reflect participant characteristics (and preferences) within the Plan

Sponsor’s objectives

Most plans can utilize an off-the-shelf Target Date product

Reasons Plan Sponsors prefer a Custom Target Date offering:

► Utilize the plan’s current investment lineup

– Lower fees

– Greater transparency

– Greater control over underlying managers

– Leverage due diligence work utilized for current lineup

► Increase diversity of asset classes

► Participant base is drastically different from the that of the average plan

► Distinct population bases within the same company plan

► Fiduciary concerns over off-the-shelf offerings

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Bridging the Plan Sponsor Objective and Participant Demographics Gap

Plan Sponsors should align their objectives and philosophy with their TD manager:

Experience

– Investment

– Operational – capability to work with various recordkeepers and custodians

Independence and Focus

– Indifferent to proprietary fund managers

Research and Processes

– Defined and repeatable

Personnel and Support

– Depth in senior investment and operational staff

– Breadth of investment offerings (e.g., manager research/monitoring, active allocation, etc.)

Communications

– Capacity to educate and support participant base

Modeling methodology and flexibility

– Ability to capture participant demographics and plan assumptions

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2. Designing the Glide Path with Participants in Mind

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Designing a Custom Glide Path with Participants in Mind

Running the model based on plan sponsor objectives and participant characteristics, a

range of optimal glide paths and associated Income Replacement Ratio (IRR) results

IRR Efficient Frontier FrameworkGlide Path Framework

Worst IRR Outcomes

Expected

IRR

Higher Risk

Tolerance

Lower Risk

Tolerance

% Equity

Allocation

Higher Risk

Tolerance

Lower Risk

Tolerance

Age

Optimal

range

Optimal range

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Glide Paths 40-Year IRR Efficient Frontier

The presence of a DB or Account Balance Plan impacts both the glide path and

IRR-EF outcomes

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

25 30 35 40 45 50 55 60 65

Eq

uit

y A

llo

ca

tio

n

Age

DC-Only

DC + Account Balance Plan

DC + Traditional DB Plan

DC-Only

DC + Account Balance Plan

DC + Traditional DB

55%

65%

75%

85%

95%

105%

115%

125%

10%20%30%40%50%60%

Ex

pe

cte

d IR

R

Worst IRR Outcomes

DC-OnlyDC + Account Balance PlanDC + Traditional DB

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

25 30 35 40 45 50 55 60 65

Eq

uit

y A

llo

ca

tio

n

Age

Contribution Rate = 9%

Contribution Rate = 12%

Contribution Rate=9%


60%

65%

70%

75%

80%

85%

90%

95%

100%

105%

110%

15%16%17%18%19%20%21%22%23%

Ex

pe

cte

d IR

R

Worst IRR Outcomes




Slight differences in contribution rates impact the IRR-EF outcome, but not

necessarily the Glide Paths

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The uncertainty surrounding salary levels and growth expectations impact both

glide path and IRR-EF outcomes

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

25 30 35 40 45 50 55 60 65

Eq

uit

y A

llo

ca

tio

n

Age

1/2 Typical Volatility

Typical Volatility50%

55%

60%

65%

70%

75%

80%

85%

15%16%17%18%19%20%21%22%23%

Ex

pe

cte

d IR

R

Worst IRR Outcomes

1/2 Typical Volatility

Typical Volatility

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

25 30 35 40 45 50 55 60 65

Eq

uit

y A

llo

ca

tio

n

Age

7%

9%

11%

13%

15%

17%

19%

21%

23%

25%

-9%-7%-5%-3%-1%1%

Co

ntr

ibu

tio

n t

o E

xp

ec

ted

IR

R

Worst IRR Outcome



Viewing the glide path range in a shorter time frame on the IRR-EF

Ages 60-64

Ages 55-59

Ages 50-54

Ages 45-49

Customized

Optimal Range

Higher Risk

Tolerance

Lower Risk

Tolerance

Higher Risk

Tolerance

Lower Risk

Tolerance

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Conclusion

Target Date funds can play an essential role in ensuring retirement readiness for

plan participants, but not all Target Date Funds are appropriate

■ Optimal glide path design follows from Plan Sponsor’s preferences and objectives

■ Optimal glide path design incorporates input assumptions

■ An evaluation framework which balances risk and IRR is necessary to ensure optimal

glide paths

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Thank you

Hugh Boyle – Institutional Sales and Relationship Management

[email protected]

ING U.S. Investment Management

mailto:[email protected]

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This information is proprietary and cannot be reproduced or distributed. Certain information may be

received from sources ING Investment Management U.S. (“ING U.S. IM”) considers reliable; ING U.S.

IM does not represent that such information is accurate or complete. Certain statements contained

herein may constitute "projections," "forecasts" and other "forward-looking statements" which do

not reflect actual results and are based primarily upon applying retroactively a hypothetical set of

assumptions to certain historical financial data. Actual results, performance or events may differ

materially from those in such statements. Any opinions, projections, forecasts and forward looking

statements presented herein are valid only as of the date of this document and are subject to

change. Nothing contained herein should be construed as (i) an offer to buy any security or (ii) a

recommendation as to the advisability of investing in, purchasing or selling any security. ING U.S.

IM assumes no obligation to update any forward-looking information.

©2014 ING Investments Distributor, LLC, 230 Park Avenue, New York, NY 10169

Compliance Approval # 9003

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Numerous factors affect the outcome of a target date glide

path, however we believe the most important drivers are:

1. Plan Specific Assumptions

► Labor Income Profile(s) of Participants

► Defined Contribution Plan Details

► Pension Plan Details

2. Capital Market Assumptions

Defining the Inputs

Modeling Analysis Selection

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Plan Specific Assumptions Drive Glide Path Outcomes

■ Labor Income Profile of Participants:

1. Average real income adjusted to reflect inflation forecasts

2. Temporary shocks and permanent changes

3. Correlation to equities

■ DC Assumptions

■ Pension Plan Details

* Source: ABC Corp.; ING U.S. IM; Cocco, J. F., Gomes, F. J., & Maenhout, P. J. (2005). Consumption and portfolio choice over the life cycle. Review of

financial studies, 18(2), 491-533.


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Participant risk tolerance must also be reflected within the glide path design

Participants display an asymmetric utility for Income Replacement Ratio (IRR) as shown

below – there is diminishing marginal utility with increasing IRR

Thus, solely maximizing IRR can have an oversized effect on increasing risk relative to a

marginal gain in expected IRR

Instead, glide path design should focus on maximizing the participants’ expected utility

0% 50% 100% 150% 200%

Uti

lity

IRR

IRR Experiences Diminishing Marginal Utility


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