Target Date Fund Evaluation: What You Need to Know July 30, 2015 This material is solely for the private use of TEXpers and is not intended for public dissemination. Case Study: Analyzing Participant Asset Allocations Participant decisions are not always optimal 10 9 8 7 Equity Allocation 5 3 1 25 30 35 40 45 50 55 60 65 70 75 Age Participants Target Date Glidepath As of June 30, 2013. Source: SSGA Defined Contribution Team based on sample plan sponsor data set Allocations are as of the date indicated, are subject to change, and should not be relied upon as current thereafter. s and forecasts used by SSGA in developing the Portfolio s asset allocation glide path may not be in line with future capital market returns and participant savings activities, which could result in losses near, at or after the target date year or could result in the Portfolio not providing adequate income at and through retirement. For illustrative purposes only. GLSTND-1976 2 1
Target Dates funds Increasingly Used as QDIA Default Options Target Date Funds are increasingly designated as the default fund option within DC plans (71% as of 2013) 1 10 9 8 7 5 3 1 64% 62% 65% 68% 71% 56% 52% 44% 27% 29% 23% 19% 17% 12% 14% 15% 16% 15% 18% 12% 11% 11% 15% 1 2% 4% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Money market or stable value fund Balanced fund Target-date fund And more individuals are contributing to a single target date fund 1 Source: Vanguard 2014 5 3 1 48% 31% 24% 27% 13% 16% 8% 4% 2006 2007 2008 2009 2010 2011 2012 2013 Estimated 2018 % of Participants Holding a Single Target Date Fund 1 Vanguard How America Saves 2014 The above estimates based on certain assumptions and analysis. There is no guarantee that the estimates will be achieved. Source: Vanguard 2014 3 Target Date Funds: Tips for Fiduciaries Establish a process for comparing and selecting How well TDF s characteristics align with employees & plan characteristics Understand TDF Selection Align objective and philosophy with product design and expected results Effective Communications Ensure participants understand basics of TDF offering Disclosures required by law must be considered Establish a process for the periodic review of selected TDFs Review any significant changes in selected offering Are plan s objectives still aligned with selected offering 4 2
Case Study: Objective Setting Objective: Achieve 85% income replacement at retirement, assuming a full career at Company X, retiring at age 65, and full benefits from DB and Social Security Baseline Benefits versus Target Glidepaths Considered 10 9 8 7 5 3 1 85% 85% 19% 29% 36% 36% 3 Exempt (Age 65) Non-Exempt (Age 65) Social Security DB Benefit 85% Target 10 9 8 7 5 3 1 20 25 30 35 40 45 50 55 60 65 70 75 80 85 Age What is the probability of filling the replacement rate gap between target and baseline benefits? Source: SSGA Defined Contribution Team based on a single plan sponsor provided data set as of March 31, 2014. The above targets are estimates based on certain assumptions and analysis made by SSGA based on sponsor provided data. There is no guarantee that the estimates will be achieved. s and forecasts used by SSGA in developing the Portfolio s asset allocation glide path may not be in line with future capital market returns and participant savings activities, which could result in losses near, at or after the target date year or could result in the Portfolio not providing adequate income at and through retirement. 5 Case Study: 85% Replacement Rate at Age 65 Retirement High level of confidence in achieving the stated replacement rate target for exempt and non-exempt employees Estimated DC Income Replacement Rates Estimated Probability of Success Probability of Replacement Rate Above the Line 1 DC Replacement Rate 1 1 10 8 136% 77% 53% 118% 11 71% 68% 5 49% Exempt 89% 89% 89% Non-Exempt 99% 99% 99% DC Replacement Rate Target for Exempt Employees (29%) 37% 37% 36% 24% 24% 25% DC Replacement Rate Target for Non-Exempt Employees (19%) Legend (Probabilities): 5% 25% 5 75% 95% Source: SSGA Defined Contribution Team based on a single plan sponsor provided data set. Wealth accumulation scenarios are generated using asset class forecasted returns provided by plan sponsor and allocations using the proposed target date solutions. These results were generated using Monte Carlo simulation (100,000 simulations) and achieved by means of a mathematical formula and do not reflect the effect of unforeseen economic and market factors on decision-making. The Forecasted returns are not necessarily indicative of future performance, which could differ substantially. Returns are nominal and gross of fees. Each scenario assumes starting salary of $58,000 for exempt employees, $36,000 for non-exempt, starting age of 21 years old, 3% wage growth, 5% drawdown, 1 deferral rate and retirement occurring at the start of the retirement year (age 65). The information shown above is intended for illustrative purposes only. Actual returns and risks will vary. 6 3
Case Study: 85% Replacement Rate at Age 65 Retirement Excluding Social Security and DB benefits reduced the probability of success and accentuates differences in glidepath design Estimated DC Income Replacement Rates Estimated Probability of Success Probability of Replacement Rate Above the Line 1 DC Replacement Rate 1 1 10 8 136% 118% 11 77% 71% 68% 53% 5 49% 37% 37% 36% All 15% 13% DC Replacement Rate Target for Exempt Employees and Non-Exempt (85%) 24% 24% 25% Legend (Probabilities): 5% 25% 5 75% 95% Source: SSGA Defined Contribution Team based a single plan sponsor provided data set. Wealth accumulation scenarios are generated using asset class forecasted returns provided by plan sponsor and allocations using the proposed target date solutions. These results were generated using Monte Carlo simulation (100,000 simulations) and achieved by means of a mathematical formula and do not reflect the effect of unforeseen economic and market factors on decision-making. The Forecasted returns are not necessarily indicative of future performance, which could differ substantially. Returns are nominal and gross of fees. Each scenario assumes starting salary of $58,000 for exempt employees, $36,000 for non-exempt, starting age of 21 years old, 3% wage growth, 5% drawdown, 1 deferral rate and retirement occurring at the start of the retirement year (age 65). The information shown above is intended for illustrative purposes only. Actual returns and risks will vary. 7 Case Study: Shock Test: Adjusting s There are several inputs that may differ by manager and impact the analysis Primary Alternative Impact of Alternative Employment Start Age 21 25 Reduces the median DC replacement rate by 17%. Risk and Correlation s SSGA s long term capital market assumptions All assets are Uncorrelated DC replacement rates at the median increases by 11% Retirement Beginning at Start or End of Retirement Age Assumed retirement occurs at the start of retirement Assumed retirement occurs at the end of retirement Increases the median DC replacement rate by 3% Timing of Contributions Contributions are made monthly after the realization of returns Contributions are made annually before the realization of returns Increases the median DC replacement rate by 3% Source: SSGA Defined Contribution Team based on a single plan sponsor provided data set. Wealth accumulation scenarios are generated using asset class forecasted returns provided by plan sponsor and allocations using the proposed target date solutions. These results were generated using Monte Carlo simulation (100,000 simulations) and achieved by means of a mathematical formula and do not reflect the effect of unforeseen economic and market factors on decision-making. The Forecasted returns are not necessarily indicative of future performance, which could differ substantially. Returns are nominal and gross of fees. Each scenario assumes starting salary of $58,000 for exempt employees, $36,000 for non-exempt, starting age of 21 years old, 3% wage growth, 5% drawdown, 1 deferral rate and retirement occurring at the start of the retirement year (age 65). The information shown above is intended for illustrative purposes only. Actual returns and risks will vary. 8 4
Appendix A: Important Disclosures IBG-15852 9 Important Disclosures Investing involves risk including the risk of loss of principal. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA's express written consent. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information. s and forecasts used by SSGA in developing. the Portfolio s asset allocation glide path may not be in line with future capital market returns and participant savings activities, which could result in losses near, at or after the target date year or could result in the Portfolio. not providing adequate income at and through retirement. Risk associated with equity investing include stock values which may fluctuate in response to the activities of individual companies and general market and economic conditions. SSGA Target Date Fund are designed for investors expecting to retire around the year indicated in each fund s name. When choosing a Fund, investors should consider whether they anticipate retiring significantly earlier or later than age 65 even if such investors retire on or near a fund s approximate target date. There may be other considerations relevant to fund selection and investors should select the fund that best meets their individual circumstances and investment goals. The funds' asset allocation strategy becomes increasingly conservative as it approaches the target date and beyond. The investment risks of each Fund change over time as its asset allocation changes. Web: www.ssga.com 2015 State Street Corporation All Rights Reserved. State Street Global Advisors, One Lincoln Street, Boston, MA 02111-2900 Tracking Number: Expiration Date: 07/31/2015 10 5