Rethinking the role of the Agg in retirement planning

Dec 10, 2023
  • BlackRock

A new approach to fixed income in LifePath target date funds aims to improve participants’ lifetime consumption.

Fixed income assets often play a crucial role in participants’ long-term retirement strategy. They provide opportunities for growth and serve as important ballast to protect against risks such as market downturns and rising inflation.

However, solving for improved retirement outcomes also requires an evaluation of our fixed income exposure through the lens of lifecycle investing. LifePath’s lifecycle consumption framework seeks to deliver consistent outcomes over multiple timeframes, an endeavor which relies on evolving but precise asset class exposures. The principal value of a strategy portfolio is not guaranteed at any time, including at and after the target date.

At BlackRock, we wanted to evaluate if a more finely-tuned approach to LifePath’s fixed income allocations could help achieve the objective of greater lifetime consumption over a participants’ lifecycle. Our research findings indicate the answer is yes.

Fixed income, reimagined

LifePath participants’ asset class exposures already shift gradually over their lifecycle, moving from more aggressive and growth-oriented strategies during a participants’ younger years to more conservative ones as those participants approach and enter retirement. Younger participants typically have heavy exposure to growth-oriented assets such as equities, and relatively little exposure to more conservative assets such as bonds. Over time, those allocations shift, with fixed income taking on a more prominent role to protect older participants’ assets against market and economic risks.

The Bloomberg Barclays Aggregate Bond Index (“the Agg”) has long been the source of fixed income investments in the LifePath funds. The Agg has served participants well, delivering both growth opportunities and stability during uneven periods in the market.

Since the primary objective of the LifePath funds is higher lifetime consumption, we believed it was worth evaluating the potential benefits of adapting BlackRock’s fixed income approach in these funds.

By breaking the Agg into its component parts—including government bonds such as U.S. Treasuries, corporate bonds and securitized assets—we believe we can deliver a more precise asset allocation strategy to LifePath participants. This approach can emphasize the security provided by certain bonds such as Treasuries, as well as the unique growth characteristics of bonds such as corporate issues and securitized assets.

Our research suggests that this disaggregated fixed income approach can deliver to participants higher lifetime consumption than they might receive through allocation in a blunt fixed income instrument such as the Agg.

The allocation equation

This evolution of fixed income allocations aims to maintain the same high-quality bond exposure found within the Agg, while improving the ability to fine-tune strategic allocations for participants based on their age and time horizons.

The glidepath and asset allocation decisions in LifePath are driven by our understanding of the evolving dynamics between human capital (an individual’s ability to earn income over their lifetime) and financial capital (an individual’s current financial wealth). Applying this framework to our fixed income exposure aligns our strategic fixed income allocations with the lifecycle objectives along the glidepath. With this research and evolution of our fixed income allocation, we believe we can more effectively help participants meet the LifePath funds’ primary objective of higher lifetime consumption.

Download the paper to see the full research.

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