LifePath® meets expectations and focuses on retirement income

Jul 28, 2021
  • BlackRock

Nick Nefouse, Head of Retirement Solutions and Global Head of LifePath, discusses recent observations in the market including the rise of interest rates, the shift from growth to value and shift in regimes along with how LifePath portfolios fared as expected in this changing environment.

Focus on retirement income

As the topic of retirement income continues to increase with plan sponsors and participants, Nick shares insights on some important considerations when adding a retirement income option to a defined contribution plan.

Hi. This is Nick Nefouse, the global head of LifePath, bringing you the updates from the path. So, I always try to frame this around interesting observations. And there's a few interesting observations that we have as we look forward or we look back. The first was really the rise in interest rates. This one was really unmistakable. We saw a very big back up in interest rates in the US primarily but outside of the US as well. I mean, that led to all sorts of problems for markets.

Primarily what we saw then, the second one, is this continued shift from growth to value stocks. More specifically, we saw a shift out of things like US large cap technology into areas that are more value oriented. Think of financials, industrials, and energy as well. A big rally in the energy markets coming out of the first quarter.

And the third point that I would make that we saw is we saw this continued shift in regimes. And this was one of the things that was most interesting about last year. The actual drawdown from last year and recovery was a very short. So, we're seeing this compression of the regimes. If I go back to our experiences in 2008, this shift took years. And last year took months.

So, the LifePath portfolios have fared very well over the last year and quite frankly in line with what we would have expected. Our longer dated portfolios for our younger investors have done very well. Again, there's about 99% growth assets in those portfolios. Our nearer dated vintages are also positive but less so given the amount of fixed income that they use. And I'll note this is all high quality fixed income.

So, one of the questions we get more than any other question is around retirement income. And I think that what most people realize is that target date funds and 401(k)s more generally have done a great job accumulating wealth over the last call it 15 years or so since the Pension Protection Act. But the question we have to get now is what do we do about retirees? And how do we turn a 401(k) plan or a target date fund into an actual retirement plan, not just an accumulation plan? So, I figured we'd spend a little bit of time today talking about some of the philosophy that BlackRock has around retirement income. And there's four notes that I've written down here.

The four core beliefs that we have about retirement income, number one, is we have to build this in a familiar structure. Just like the core menu, having an option on the core menu doesn't mean people will always select the option. The defaults really work. So, what we want to make sure that we do with income options is we want to embed them into familiar structures. And for us, that's the target date fund.

The second thing that we think a lot about is reducing friction or making it convenient. If you think about the role that the target dates funds had since PPA, it's a very convenient asset allocation product. These are low cost. These are professionally managed. And these are diversified. So, it's very convenient for an individual to purchase a target date fund when they're young and just stay the course. We see great outcomes of that. So, leveraging that familiar structure and making it very convenient to purchase income through a target date fund I think is an important aspect of this. It's not only the target date fund, though. It's about simplifying the application process or the access to any sort of income.

The third point is really around choice. So, nobody retires on their 65th birthday. We know they retire sometimes earlier, sometimes later, then they're 65 years old. So, we want to make sure we give a level of flexibility or choice on when they're going to be able to take some sort of retirement income.

And the last one I think this is extremely important is around the education. By just giving somebody something doesn't mean they're going to use it. You have to make sure we're educating the individuals about the role of income in retirement. And the simplest way to think about this is we've spent a lot of time and a lot of years getting people to accumulate large balances. And most people know roughly what their balance is in their 401(k). But they don't have any idea how much income that is per year.

So, it's shifting this mindset away from an account balance and moving a mindset more towards an income number per year we think will be very helpful. So as a quick review of the markets as well as a review of one of the questions that we received most in the last three or four months, I hope you found this interesting. Thank you.

BlackRock LifePath

Learn more about the philosophy behind how we build our portfolios

Updates from the Path

Subscribe to get timely insights on LifePath’s investment approach every quarter.
For Financial Professionals Only.
Please try again
First Name *
Please enter a valid first name
Last Name *
Please enter a valid last name
Email Address *
Please enter a valid email
Company *
This field is mandatory
Thank you
Thank you
Thank you for your subscription