A global retirement solutions executive says a stable, or even climbing, asset allocation glidepath in post-retirement may be a more sensible approach for target-date superannuation funds.
J.P. Morgan Asset Management global head of retirement solutions and portfolio manager Anne Lester said at the Conference of Major Superannuation Funds recently that the firm was completing research that looked at the major risk preferences for income in retirement and possible solutions.
New York-based Lester works as part of J.P. Morgan's multi-asset solutions team and, with a number of colleagues, started managing target-date funds more than a decade ago.
"We've always been focused on defining incomes and integrating as much as we can about the way people save and put money in to and take money out of their 401k plan," Lester said.
"But they're [401ks] very discretionary, you don't have to sign up, you don't have to contribute, and there's a lot of leakage."
She says there has been a focus at the firm on delivering a minimum level of income replacement and meeting individual outcomes. Lester adds that biases the firm towards using lots of multi-diversification and taking less risk than competitors.
"We're focused on getting people over the finish line, essentially minimising the bad outcomes rather than maximising good outcomes. When you maximise risk, the range of outcomes becomes very wide," Lester said.
"Most people [in America] take all their money within three years of retirement. That may be changing but most people's money goes away and rolls into an individual retirement account or is just cashed out and spent."
She said default options have become important in America because "for the people who don't pick a default, their asset allocation [in target-date funds] looks more like a rifle [then a glidepath]." Lester adds flatter glide paths likely lead to an individual running out of money sooner.
"It's counter-intuitive. If there's anything bad happening in the market they may run out of money very quickly. And, interestingly if nothing bad happens, it might only last about four months longer than our [target-date funds] do," Lester said.
"A lot of approaches try to manage against market and event risk, so they're more conservative. They don't get enough return when your assets are bigger.
"A more stable glidepath or an increasing glidepath makes a lot more sense than one that continues to de-risk. It's uncommon practically because it flies in the face of what feels like the safe answer for someone older. To say I'm going to start adding equities when you reach 85, that sounds mad but we'll have to see."