Goldilocks and the Three Glide Paths: Part 1 – TOO HOT!

Much like Goldilocks looking for the right porridge, investors preparing for retirement have a great deal of choices and many are not “just right.” I’m the lead portfolio manager of The Principal target date series, and I’m going to use a fairy tale analogy to help explain the forest and the path we take through it. Target date investment options are designed to help an individual navigate the course between a career of saving and a comfortable retirement. While I manage target date series that can be used by any investor, I’ll focus here on the participant in a workplace retirement plan – so think of “Goldilocks” as a “participant”.

Financial professionals can help educate their clients about how the asset allocation choices they make can impact their participants’ ability to meet their retirement goals. This is where my fairy tale analogy breaks down – no one is a bear, wolf, or witch. All involved are trying to help educate participants about making decisions that may help them reach retirement-readiness.

Porridge temperature = RISK

What is risk? Goldilocks faces a daunting task; how much risk should she take in investing for retirement? Unfortunately, there isn’t just one risk and the average participant may not understand them all.

There are generally four types of risk that I believe participants investing for retirement should consider, and I consider when making decisions within the funds I manage:

  • Risk of loss/lost principal: this is the likelihood of investment losses due to market movements or credit events. (Remember 2008?)
  • Volatility: this represents the swings in the market value of an investment both up and down over a period of time. Take for example, an investment that starts at a value of $100, and ends at $100, in theory, has incurred no principal loss. But, if that investment fluctuated between $80 and $120 during the period the investment was held, it certainly would have demonstrated volatility. Huge swings in the value of investments are tough to ignore, and historically the more an investment fluctuates, the more likely an average investor is to make a knee-jerk reaction – which can have negative impacts.
  • Inflation risk: this is basically a dollar’s decline of purchasing power over time. Inflation creates a burden which the portfolio must overcome to make the value of the dollars invested retain (and hopefully overcome) their value in the future.
  • Shortfall risk. Shortfall risk is the risk that a participant will fall short of their investing goals. This can be due to not investing enough or generating insufficient returns (which is tied to ‘risk of loss’.) The problem with shortfall risk is that it requires, at times, a participant to take other risks, which they may not understand well. It’s a participant’s responsibility to save adequately, but knowing that many don’t, I manage the portfolio to have a higher equities allocation in the earlier years to focus on growth when the participant has a long-term investing horizon.

A target date investment option strives to address these risks through asset allocation, the practice of having a mix of different investment options from various asset classes within an investment portfolio. It’s important to note that even asset allocation can’t protect against loss in times of declining values across the market. Each target date investment option has a glide path, which is how a portfolio manager works to balance potential risks with potential return over time. A glide path, generally, starts with a more aggressive asset allocation and becomes more conservative as the target date approaches.

This one’s too hot! Some glide paths may take on too much risk, looking for higher potential return. One argument that can be made is that participants investing for retirement have very long time horizons and therefore are able to take almost unlimited risk. This argument suggests the participant will find that volatility risk is irrelevant. Some may trot out statistics and show that an investor can expect average returns over longer periods of time to suggest a participant can expect average returns and volatility (as measured by standard deviation) is not an issue. And, certainly if we were investing in a fairy-tale world which exactly mimicked the past, this could potentially all be true. Stocks have traditionally returned more than bonds, and as such a portfolio of stocks could have outperformed a more conservative portfolio of bonds.

The flaw in this logic is basic – we don’t live in a fairy-tale world. Risk does matter, at least psychologically if nothing else. A 2012 analysis by the Principal Financial Group® suggested that “do-it-myself” participants tended throughout the past decade to have had higher equity allocations than did participants seeking guidance through a target date investment option. Not surprisingly, this trend reversed following the financial crisis of 2008 – many of those heavily invested in equities flocked to traditionally safer investment options. As such, they recovered less in the following recovery.

Lost principal risk is most critical in the periods immediately around the target date. The reason is that participants investing in the account have the most at stake at retirement in terms of assets, and the shift to income will bring about a change in the dynamics between saving and distribution. To better see this, consider the following example:

Each participant: invests $5,000 per year starting at age 25; earns 7% per year in returns; and takes a 40% loss to their portfolio at some point. Timing of the loss makes a big difference.
Participant Suffers 40% loss at age Ending balance (assume retirement age is 65) Retirement income in the first year (4.5% of balance)













7% annual returns and 40% loss are hypothetical, and for Illustrative purposes only. Does not represent any specific investor.

Since these investments options are designed to fund retirement, one can readily see what a dramatic impact a late-career loss could have on the participant’s lifestyle in retirement. Participant 1 would have almost $42,000 to spend in retirement, while Participant 3 would garner only $27,000. That’s a big hit.

Participant 3 is a great example of a glide path that was “too hot” (i.e. exposed to too much risk of loss of principal) at the wrong time. But only some of the four risks contribute to a “too hot” glide path.

Where do the others fit in? Read part 2 of the series – “Too cold”…



About Target Date investment options:

Target date portfolios are managed toward a particular target date, or the approximate date the investor is expected to start withdrawing money from the portfolio. As each target date portfolio approaches its target date, the investment mix becomes more conservative by increasing exposure to generally more conservative investments and reducing exposure to typically more aggressive investments. Neither the principal nor the underlying assets of target date portfolios are guaranteed at any time, including the target date. Investment risk remains at all times. Neither asset allocation nor diversification can assure a profit or protect against a loss in down markets. Be sure to see the relevant prospectus or offering document for full discussion of a target date investment option including determination of when the portfolio achieves its most conservative allocation.

 Investors should carefully consider a mutual fund’s investment objectives, risks, charges and expenses prior to investing. A prospectus, or summary prospectus if available, containing this and other information can be obtained by contacting a financial professional, visiting, or calling 800-547-7754. Read the prospectus carefully before investing.

Before directing retirement funds to a separate account, investors should carefully consider the investment objectives, risks, charges and expenses of the separate account as well as their individual risk tolerance, time horizon and goals. For additional information contact us at 800-547-7754 or by visiting

Delaware Charter Guarantee & Trust Company, conducting business as Principal TrustSM Company (“Principal Trust”), a member of the Principal Financial Group®, maintains various Collective Investment Funds, as trustee, under certain plan and declaration of trust documents, which may be amended from time to time (“Trusts”). Principal Trust has discretion over the investment of the Collective Investment Funds which may only consist of assets of qualified plans. . Principal Management Corporation (“PMC”), an affiliate of Principal Trust, provides nondiscretionary advisory services to Principal Trust with respect to the Collective Investment Funds. The Collective Investment Funds are not guaranteed by Principal Trust, PMC, any of their affiliates, the FDIC or any other governmental agency. Participation in Collective Investment Funds offered by Principal Trust is governed by the terms of the applicable Trust and a Participation Agreement. Visit to obtain a copy of the relevant Collective Investment Fund Summary document for addition important information.

Investment options are subject to investment risk. Shares or unit values will fluctuate and investments, when redeemed, may be worth more or less than their original cost.

Asset allocation does not guarantee a profit or protect against a loss. Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. International and global investment options are subject to additional risk due to fluctuating exchange rates, foreign accounting and financial policies, and other economic and political environments. These risks are magnified in emerging markets. Investing in real estate, small-cap, international and high-yield investment options involves additional risks.

There is no guarantee that a target date investment will provide adequate income at or through retirement.

Insurance products and plan administrative services are provided by Principal Life Insurance Company. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities are offered through Princor Financial Services Corporation, 800-547-7754, Member SIPC and/or independent broker/dealers. Securities sold by a Princor Registered Representative are offered through Princor®. Principal Funds Distributor, Princor and Principal Life are members of the Principal Financial Group®, Des Moines, IA 50392. Investment options may not be available in all states or U.S. commonwealths. Separate Accounts are available through a group annuity contract with Principal Life Insurance Company. See the group annuity contract for the full name of the Separate Account. Principal Life Insurance Company reserves the right to defer payments or transfers from Principal Life Separate Accounts as permitted by the group annuity contracts providing access to the Separate Accounts or as required by applicable law. Such deferment will be based on factors that may include situations such as: unstable or disorderly financial markets; investment conditions which do not allow for orderly investment transactions; or investment, liquidity and other risks inherent in real estate (such as those associated with general and local economic conditions). If you elect to allocate funds to a Separate Account, you may not be able to immediately withdraw them.

May lose value. Not a deposit. No bank or credit union guarantee. Not insured by any Federal government agency.



1  Source: Principal Financial Group, August, 2012, Impact of Target Date Investment Options analysis

This research was based on a subset of 2.4 million participants of The Principal, of which:

  • This research only takes into account the participants’ assets within the defined contribution (DC) retirement plan serviced through The Principal. It does not consider any additional assets these participants may have and how any such assets may factor in to their goals for and asset allocation decisions on the retirement plan assets.
  • Approximately 744,000 were target date investment options users (do-it-for-me). Target date investment option users were defined as participants with assets solely in target date investment option made available by The Principal.
  • Approximately 877,000 were do-it-myself participants, defined as participants with no assets in any target date investment option made available by The Principal.
  • Participants who have some assets in a target date and/or target risk investment option, as well as any participant using an asset allocation service or advisory program made available by The Principal were excluded from the analysis.
  • The average equity exposure for each target date category, according to each specific age band, was compared against the combined total across the following asset classes as categorized by Morningstar’s US Open Ended Mutual Fund category: “Employer Security”, “International Equity”, “Large US Equity”, and “Small/Mid US Equity”. Target date investment options that invest in individual securities (rather than funds of funds) were excluded, as well as those target date investment options that invest primarily in another underlying asset allocation option.