White Papers | April 05, 2014

Investing for Retirement: The Defined Contribution Challenge

This research is related to the newly launched Nebo platform, a portfolio construction tool that helps RIAs build better portfolios. Nebo bridges the gap between financial planning and asset management, and recently won the WealthManagement.com 2022 Industry Disruptor award.

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Executive Summary

The retirement landscape has changed. Defined benefit plans have given way to defined contribution (DC) plans, and Target date funds are rapidly becoming the workhorse for DC plans.

By and large, current target date funds resemble the old investment advisor adage that stock weight should be about 110 minus a person’s age. While this satisfies the common-sense intuition that, all things being equal, weight in stocks should go down as a person ages, there are a number of problems with this approach.

In this paper we focus on two in particular. First, the standard solution is inflexible: all things are rarely equal. To address this shortcoming, we introduce a framework based on a common-sense definition of risk: not having enough wealth in retirement. The goal is not to put investors into yachts, but rather to increase the odds that they have the appropriate level of resources in retirement. Second, the standard solutions do not recognize that expected returns vary over time. We show that dynamic asset allocation – moving your assets – is an essential part of achieving retirement goals.

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Disclaimer: The views expressed are the views of Mr. Inker and Dr. Tarlie through the period ending April 2014 and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security. The article may contain some forward looking statements. There can be no guarantee that any forward looking statement will be realized. GMO undertakes no obligation to publicly update forward looking statements, whether as a result of new information, future events or otherwise. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to securities and/or issuers are for illustrative purposes only. References made to securities or issuers are not representative of all of the securities purchased, sold or recommended for advisory clients, and it should not be assumed that the investment in the securities was or will be profitable. There is no guarantee that these investment strategies will work under all market conditions, and each investor should evaluate the suitability of their investments for the long term, especially during periods of downturns in the markets.
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