Stefan Hubrich, CFA, Ph.D., Director of Asset Allocation Research,

T. Rowe Price

Judith Ward, CFP®,Senior Financial Planner, T. Rowe Price

Considerations for

Evaluating Target

Date Glide Paths

Things to Keep in Mind

We are introducing a framework for target date evaluation.

We are focusing on the equity exposure—the main driver.

(And recognize there are many other important factors).

We will consider highly stylized cases, and in reality, plan

sponsors face variety in their process.

We will focus on how goals and behavior interact with target

date evaluation and outcomes.

2

Target Date Evaluation Is Getting Complicated

3

LOTS OF RESEARCH

MEDIA BUZZ

WIDE RANGE OF CHOICES

GOVERNMENT INVOLVEMENT

Department of Labor

DC plans move to custom target-date portfolios

Participant needs are key to move toward custom target-date funds

Should Retirees Rely on Target-Date Funds?

TARGET DATE

EVALUATION

Misleading Single Drivers of Target Date Evaluation

4

cation/single

TARGET DATE

EVALUATION

Longevity risk

Fees

Market risk

Rollover behavior at retirement

Undersaving

Inflation risk

Time diversification

Component selection

What’s Important in Driving Retirement Outcomes?

5

Behavior Goals & Preferences

Equity Exposure Active/Passive

Fees Glide Path Shape

RETIREMENT

OUTCOMES

Need to Consider Everything Simultaneously

6

GOAL

RISK

FOCUS

SAVINGS

BEHAVIOR

ENVIRONMENT

EQUITY EXPOSURE

7

Plan Sponsor Determines Goal

GOAL

Focus on ability to obtain

a reliable income stream

in retirement

Focus on balance at the

time of leaving employer

(retirement or job change)

What’s the purpose of my plan?

Why do our employees value having a 401(k)?

How do we measure success—the balance or income stream?

Do we want our employees to stay in the plan when they leave?

GOAL

RETIREMENT

INCOME

BALANCE

ACCUMULATION

8

Both Retirement Income and Balance Risk Are Impacted by Market Risk

RISK FOCUS

Real World Risk Drivers

Uncertainties that need to be included

in the analysis

Risks Experienced by Participants

What ultimately matters from participants’

perspective

RETIREMENT INCOME RISK

BALANCE RISK

9

What Is “Good” Behavior?

SalaryContribution

RatePARTICIPANT & EMPLOYER

Defined Benefit

PlanLOW

HIGH

Leads to stronger

asset growth potential

Social Security is phased

out at higher levels

The results:

– Replace lower income percentage for high earners

– Higher earners demand more from 401(k) to maintain standard of living in retirement

Reduces income

demand from

401(k) assets

in retirement

SAVINGS BEHAVIOR

Sponsors impact savings behavior—the cash flows in and out of the plan.

10

Capturing the Environment Appropriately

ENVIRONMENT

WHY THIS MATTERS

Represent “how the world works”

Must capture correctly

Empirical exercise

Modeling work for the Target Date provider

Model the uncertainties (“risks”) to capture

the distribution of these factors

– Better way to be conservative than a

fixed “pessimistic” assumption

Capital Markets Longevity

Laws and Regulations

11

Goal? Risk Focus?

BALANCEACCUMULATION

RETIREMENTINCOME

BALANCERISK

RETIREMENTINCOME

RISK

EQUITY EXPOSURE

MORE

EQUITY

Equity exposure actually hedges retirement income risk.

12

WORSE

Goal? Risk Focus?

BALANCEACCUMULATION

RETIREMENTINCOME

BALANCERISK

RETIREMENTINCOME

RISK

Savings Behavior?

EQUITY EXPOSURE

LESS

EQUITY

BETTER

Good behavior makes it easier to address balance risk.

13

WORSE

Goal? Risk Focus?

BALANCEACCUMULATION

RETIREMENTINCOME

BALANCERISK

RETIREMENTINCOME

RISK

Savings Behavior?

EQUITY EXPOSURE

BETTER

Challenging behavior forces a tough choice between goal and risk.

14

Goal? Risk Focus?

BALANCEACCUMULATION

RETIREMENTINCOME

BALANCERISK

EQUITY EXPOSURE

MORE

EQUITY

Equities can potentially help balance accumulation if sponsor is not concerned about risk.

RETIREMENTINCOME

RISK

15

Goal?

BALANCEACCUMULATION

RETIREMENTINCOME

EQUITY EXPOSURE

LESS

EQUITY

Risk tolerance drives equity exposure with accumulation goal.

Risk Focus?

BALANCERISK

RETIREMENTINCOME

RISK

16

Read the full research paper:

Evaluation of Target-Date

Glide Paths Within

Defined Contribution Plans

17

ACTUALLYWhat’s

Happening?

What is your priority in target date design

between asset growth to support lifetime

income generation vs. capital preservation?

18

(A) (B) (C) (D) (E)

1 2 3 4 5

Exclusive

emphasis on

capital

preservation

Both objectives

equally

important

Exclusive

emphasis on

lifetime income

generation

19

4%

36%

27%

34%

(A) (B) (C) (D) (E)

1 2 3 4 5

Exclusive

emphasis on

capital

preservation

Both objectives

equally

important

Exclusive

emphasis on

lifetime income

generation

0%

Participants Have a Retirement Income Focus Too

20

84% 65-year-old Terminated Participants

are out of plan in 3 years

Assets remain invested in the retirement system

Participants Don’t React to Market Events

21

86% 97%Non-Target Date investors did nothing Target Date investors did nothing

How Do Participants Behave?

22 Source: PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans (2013), reflecting plan year 2012

As of December 31, 2012

800

900

1,000

1,100

1,200

1,300

1,400

1,500

0%

20%

40%

60%

80%

100%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Industry Average of Participants Contributing (left axis)

S&P 500 Index Year-End Close (right axis)

Percentage of

participants

contributing to

their plan stays in

the mid-80%s

regardless

of market

performance

How Do Participants React?

23 Source: PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans (2013), reflecting plan year 2012. Non-HCEs.

As of December 31, 2012

0%

5%

10%

15%

20%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012400

600

800

1,000

1,200

1,400

1,600

S&P 500 Index Year-End Close (right axis)

Industry Average of Contribution Amount (left axis)

Contribution Target Amount (left axis)

Participant

contribution

amount stays

around 5%

regardless of

market

performance

We Need to Close the Gap

24 Source: PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans (2013), reflecting plan year 2012. Non-HCEs.

As of December 31, 2012

0%

5%

10%

15%

20%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012400

600

800

1,000

1,200

1,400

1,600

S&P 500 Index Year-End Close (right axis)

Contribution Target Amount (left axis)

Industry Average of Contribution Amount (left axis)

Participants

are not saving

nearly enough

15% Contribution Target Amount

The Tradeoff

25

We can’t have our employees save 2% more. That would

mean a 2% drop in their lifestyle; they can’t handle that!

Implied framing:

No Treatment (Do Nothing)

David ($40,000 salary): Age 25

– $0 balance

– 0% contribution rate

– 0% employer contribution

When David starts withdrawals

at age 65, what percent of his

salary will he replace?

26

David, Age 25

27

Employer match of 50%, up to 6%; 7% rate of return; 3% inflation. Current lifestyle is 90% of current salary (remainder lost to payroll taxes, rounded off to 10%) minus final savings rate; 25% of current salary is replaced by Social

Security and Other sources (e.g., DB plan or wages). Number shown is percent of lifestyle covered by savings at age 65 with a 4% initial withdrawal amount. This chart is for illustrative purposes only and not meant to represent the

performance of any specific investment option.

28%Income

Replaced

Income Replaced

49%

Income Replaced

100%

Drop in Lifestyle

51%

0%

25%

50%

75%

100%

No Treatment Auto-enrollment: 3%Auto-increase: 0%

Auto-enrollment:6%Auto-increase: 2%

Total: 15%

72%DROP IN

LIFESTYLE

Reframe the Trade-off

It’s not 2% vs. 0%

The choice is 2% vs. 72%!

28

David, Age 25

29

Employer match of 50%, up to 6%; 7% rate of return; 3% inflation. Current lifestyle is 90% of current salary (remainder lost to payroll taxes, rounded off to 10%) minus final savings rate; 25% of current salary is replaced by Social

Security and Other sources (e.g., DB plan or wages). Number shown is percent of lifestyle covered by savings at age 65 with a 4% initial withdrawal amount. This chart is for illustrative purposes only and not meant to represent the

performance of any specific investment option.

28%Income

Replaced

49%Income

Replaced

0%

25%

50%

75%

100%

No Treatment Auto-enrollment: 3%Auto-increase: 0%

Auto-enrollment:6%Auto-increase: 2%

Total: 15%

72%DROP IN

LIFESTYLE

51%DROP IN

LIFESTYLE

100%INCOME

REPLACED

Who Is Being Helped by Auto Solutions?

30

CurrentNew

Improve savings behavior by including all employees in auto solutions.

Here’s What You Need to Remember

You should consider plan goals and risk focus when evaluating

target date glide paths.

Most plan sponsors and participants still display a retirement

income focus—implying a healthy equity exposure is appropriate

for them.

Behavior is a key input for target date evaluation, and it drives

retirement outcomes.

Plan sponsors can overcome challenging savings behavior with

intelligent plan design.

31

32 T. Rowe Price Investment Services, Inc., distributor, T. Rowe Price mutual funds.

Call 1-877-804-2315 to request a prospectus, which includes

investment objectives, risks, fees, expenses, and other information

that you should read and consider carefully before investing.

The principal value of target-date investments is not guaranteed at any

time, including at or after the target date, which is the approximate date

when investors plan to retire. These investments typically invest in a

broad range of stocks, bonds, and short-term investments and are

subject to the risks of different areas of the market. In addition, the

objectives of target-date investments typically change over time to

become more conservative.