Understanding Target Date Glide Paths

Shifting Asset Allocation

ESG Target Date models contain a mix of U.S. stocks, non-U.S. stocks, U.S. bonds, non-U.S. bonds and cash. These assets are allocated based on a certain target retirement date. Gradually, the asset allocation shifts focus from a growth oriented allocation to an income oriented allocation as the investor approaches his retirement date. This is done by first overweighting growth assets in the model (U.S. and non-U.S. stocks) and then slowly increasing the weight of income assets in the model (U.S. bonds, non-U.S. bonds, and cash). The weighting of the assets in the models over time is known as a glide path. The ESG Target Date glide path is displayed above. You can see how the weighting of the different assets shifts over time to become increasingly conservative when approaching retirement. 

Why Change the Asset Allocation?

Younger investors have many years to save for retirement and recover from an economic decline; therefore, these investors may desire to invest in more risky, growth oriented assets. As time passes and the investor approaches retirement, there may not be adequate time for the investor to recover from an economic decline. Consequently, the investor should reduce the amount of risk in the portfolio and invest in assets that preserve savings. This shifting focus, from growth to preservation, is why target date funds shift asset allocation over time.