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Investment Insights

Beyond Averages: A More Robust Approach to Glide-Path Design

Lorie Latham, CFA, Senior Defined Contribution Strategist
Zachary Rayfield, Ph.D., Quantitative Investment Analyst, Multi-Asset
Kathryn Farrell, CFA, Portfolio Specialist

Key Inputs Should Reflect Diversity of DC Plan Populations.

Key Insights

  • T. Rowe Price believes that failing to account for the heterogeneity of defined contribution participant populations in glide‑path design may lead to poor retirement outcomes.
  • Many target date providers use simple averages to represent key participant characteristics and behavioral preferences in their glide‑path models.
  • By using distributions of values within plan populations instead of averages, T. Rowe Price seeks to produce more robust target date offerings for all participants.

Many target date providers use averages as the primary population inputs when designing glide paths for defined contribution (DC) plans. We believe this method is not effective given that target date strategies are designed to be used by broad, diverse populations. These populations are not homogeneous—just the opposite, in fact. Plan participants may exhibit a variety of demographic characteristics and differing investment preferences.

We believe that not accounting for the heterogeneous nature of DC participants when designing and implementing target date glide paths ultimately may lead to retirement outcomes that fall wide of the mark for many plan participants.

Our research and insights into DC populations and participant behaviors suggest that glide‑path models that use distributions of the key participant characteristics as design inputs instead of simple averages potentially can do a better job of capturing the diversity of participant characteristics within DC plan populations.

In solutions customized at the participant level, such as managed accounts, the problem of heterogeneity is avoided entirely, as glide paths can be designed based on each participant’s specific circumstances, objectives, and preferences. However, use of managed accounts as the default option is neither typical nor necessarily desirable among DC plans due to a number of potential downsides, including potentially higher costs and the need for participants to engage and provide personalized inputs in order for the benefits to be achieved.

Opening Quote ...DC plan populations inevitably include a range of individuals with differing demographic characteristics.... Closing Quote

At T. Rowe Price, our glide‑path work draws on our recordkeeping database of over 2 million DC plan participants. Based on aggregate, depersonalized data from this source, we have developed inputs that reflect the key demographic attributes and behavioral preferences of a real‑world universe of actual plan participants. In our view, this approach represents a more practical, lower‑cost alternative to individually customized solutions while avoiding the inherent limitations of a design methodology based on simple averages.

The role of asset accumulation within DC plans as a critical lever in retirement planning emphasizes how important it is for plan sponsors and their investment advisors to understand the implications of different target date design approaches. In our view, plan sponsors would be well served by selecting target date strategies with glide paths that are based on realistic assumptions about participant demographics and preferences and, thus, seek to improve retirement outcomes for the entire plan population.

Designing Glide Paths for Diverse Populations

Target date strategies provide DC plan participants with appropriately diversified portfolios designed to pursue long‑term retirement investment objectives. By moving along preset glide paths, target date asset allocations can reflect the evolving needs and risk tolerances of participants as they pass through the accumulation phase of their investment life cycle and into retirement.

However, DC plan populations inevitably include a range of individuals with differing demographic characteristics—such as age, current and expected earnings, and savings behavior—and risk preferences. Yet, many investment providers seek to design their glide paths based on inputs that reflect a single “average” participant.

With this as the backdrop, consider the mathematical definition of “average”—the result obtained by adding multiple quantities together and then dividing the total by the number of quantities. While simple averages are easy to understand and likely adequate for many uses, we believe using them as inputs in the glide‑path design is a vast oversimplification.

Given the impact that glide‑path design can have on long‑term retirement outcomes, we believe the use of oversimplifying assumptions can create significant downside risks for plan sponsors and participants.

We can illustrate these risks by taking a closer look at two key participant demographic inputs that are integral to glide‑path modeling:

  • expected earnings levels
  • savings behavior

Each of these inputs has substantial influence in glide‑path design—in particular, in setting the appropriate allocation between equity and fixed income assets at any given point on the path, both before and after retirement.

However, the ranges of salaries and contribution rates within a DC plan population may be quite wide. A design methodology based on simple averages may result in suboptimal asset allocations and retirement outcomes for a significant number of participants.

Take, for example, the hypothetical income groups in Figure 1, which displays both their plan participation rates and their projected income replacement from Social Security. The lower‑income cohorts (such as the participants in the second quintile) have less discretionary income and, thus, may not be able to save as large a share of their earnings as the middle‑ and higher‑income cohorts. The lower‑income groups are likely to need more growth from their DC plan accounts to mitigate their relatively low saving rates and close the gap between their expected Social Security benefits and their consumption needs in retirement.

(Fig. 1) Lower and Higher Income Groups Are Both Likely to Need More Portfolio Growth
Social Security Replacement1 and Retirement Plan Access by Income2
As of April 2019

Sources: Social Security Administration and University of Minnesota.
1Clingman, M., Burkhalter, K., and Chaplain, C. (April 2019), Replacement Rates for Hypothetical Retired Workers. Actuarial Note 2019.9. Social Security Administration, Office of the Chief Actuary. On the Web at:
2ASEC 2018, IPUMS-CPS. University of Minnesota,

Our model for glide‑path design has evolved to emphasize the role of nondiscretionary consumption in the spending model in a systematic manner. Recognizing that the share of total expenses dedicated to discretionary spending tends to be lower for lower‑earning participants, we tie this observation to a preference for avoiding balance depletion that is a feature of our behavioral spending model.1 Namely, lower income reflects a lower share of discretionary spending and, thus, a lower preference for avoiding depleting assets. Likewise, higher income reflects a larger share of income devoted to discretionary spending, greater ability to save, and a reduced focus on immediate consumption—resulting in a higher preference for avoiding the depletion of assets.

Next, consider a participant who falls somewhere in the middle of the earnings distribution (in the fourth quintile in Figure 1, for example) but also has a relatively low savings rate. This individual is likely to experience an even larger shortfall in his or her ability to cover consumption needs in retirement because Social Security benefits will close less of the gap. This example illustrates the potential pitfalls in relying on simple averages when seeking to design optimal glide paths, which may miss the mark in terms of serving the entire plan population well.

Opening Quote We believe that longevity risk—a shortfall of funds during retirement—has become one of the most important risks that must be addressed in retirement planning. Closing Quote

Longevity Risk Is an Increasingly Critical Design Factor

Savers face many risks throughout the course of financially preparing for retirement. These may include market risks (such as price volatility and the erosion of real portfolio values by inflation) as well as behavioral risks (such as insufficient savings or failed attempts to time the market). We believe that longevity risk—a shortfall of funds during retirement—has become one of the most important risks that must be addressed in retirement planning.

Americans now are living longer, which means a career’s worth of savings might need to fund a retirement lasting many decades. For example, recent actuarial estimates indicated that for a hypothetical male‑female couple, both 65 years old, at least one member had an 80% probability of living to age 85, or another two decades, a 60% probability of living to age 90, or two and a half decades, and a nearly 33% chance of living to 95—three full decades of retirement (Figure 2).

Our modeling approach reflects these considerations by thinking of glide‑path optimization as a planning problem. Namely, we allow each individual to have a specific retirement planning horizon, which is tied to a timing preference in our behavioral spending model. The mortality discount that we apply to each time period scenario in our analysis is conditional on an individual living until their specific plan horizon, rather than simply living until retirement age. In practice, we calibrate these planning horizons to the preferences of plan sponsors, allowing us to incorporate sponsors’ views into our glide‑path design in a systematic manner.

(Fig. 2) Today’s DC Plan Participants Can Expect Lengthy Retirements
Actuarial Estimates of Expected Survival Rates at Age 651
Sources: DrinkerBiddle, BNY Mellon, Cannex Financial Exchange, and Society of Actuaries.

1Estimates developed by the Cannex Financial Exchange based on the Society of Actuaries RP 2014 Mortality Table with MP 2014 Projection Scale for 2015, which reflects the mortality experience of participants in U.S. pension plans.

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Beyond Averages: A More Robust Approach to Glide‑Path Design

1For additional details on our behavioral spending model, please see the Appendix.
2Please see the Appendix for a description of T. Rowe Price’s glide‑path methodology.

Important Information
This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.

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ID0002882 (01/2020)