A Smoother Ride for Near Retirees

Incorporating Equity Index Put Writing into Near-Dated Target Date Funds

While there are many unknowns for employees when it comes to retirement planning—how much to save, where to invest, how long will retirement last—the most frightening may be whether the wealth they’ve accumulated over the years will last their entire post-work lives.

Years of careful planning and diligent investment can be waylaid by a large loss in the critical 10 – 15 years before retirement and have a huge detrimental impact on the longevity of a retiree’s savings.

This risk of experiencing a large drawdown near or in retirement is what drives the long-simmering “to versus through” debate within the target date fund community. “To” target date funds reach their most conservative asset allocation at the point of retirement, having reduced portfolio risk sharply over the previous 10 – 15 years to protect against large drawdowns as that date approaches. “Through” products, in contrast, embrace higher allocations to riskier assets near and even beyond the retirement date in an effort to generate growth and protect against longevity risk (the risk of outliving one’s savings).

At the end of the day, participants nearing retirement need strategies that seek both to mitigate risk and to provide growth potential. We believe replacing a portion of a near-dated target date fund’s equity exposure with a collateralized put write strategy—an option strategy in which the portfolio manager systematically sells fully collateralized short-dated put options on a variety of indexes in an effort to generate equity-like returns with lower volatility over time—can help in this pursuit. Because certain participants may not know how to effectively manage exposure to a put-write strategy, we believe these strategies belong within target date, asset allocation and other professionally managed retirement strategies rather than on a core plan menu.

In this white paper we discuss put write strategies and their potential benefits, explore the importance of providing downside mitigation for near retirees, and illustrate the hypothetical impact of a put write allocation on participant outcomes.

Portfolio with CBOE S&P 500 PutWrite Index Returns Resulted in Improved Return and Less Volatility

Hypothetical Results, Data from 1988 – 2017

Source: Bloomberg. For illustrative purposes only. Asset allocations are rebalanced annually. Asset allocations and performance are represented by benchmarks and do not represent any Neuberger Berman investment product or service. See page 8 of the white paper for allocation weightings and benchmarks. Results shown are hypothetical, do not represent the returns of any particular investment and do not reflect the fees and expenses associated with managing a portfolio. Indexes are unmanaged and are not available for direct investment. Unless otherwise indicated, returns reflect reinvestment of dividends and distributions. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.
Note: Descriptions of the Standard and Enhanced TDF glidepaths can be found on page 7 of the white paper.

Portfolio with CBOE S&P 500 PutWrite Index Returns Resulted in Lower Drawdowns and Experienced Faster Recovery in Periods of Market Stress

Hypothetical Performance in Periods of Market Stress

Source: Bloomberg LP. For illustrative purposes only. Asset allocations are rebalanced annually. Asset allocations and performance are represented by benchmarks and do not represent any Neuberger Berman investment product or service. See page 8 of the white paper for allocation weightings and benchmarks. Results shown are hypothetical, do not represent the returns of any particular investment and do not reflect the fees and expenses associated with managing a portfolio. Indexes are unmanaged and are not available for direct investment. Unless otherwise indicated, returns reflect reinvestment of dividends and distributions. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

The performance and risk estimates above are hypothetical in nature and simulation are based upon return and risk assumption which reflects the average index returns and volatility from 6/30/1986 – 12/31/17. The estimates do not reflect actual investment results and are not guarantees of future results. See page 8 of the white paper for allocation weightings and benchmarks. Results shown are hypothetical, do not represent the returns of any particular investment and do not reflect the fees and expenses associated with managing a portfolio. Asset classes are represented by benchmarks and do not represent any Neuberger Berman investment product or service. Indexes are unmanaged and are not available for direct investment. Unless otherwise indicated, returns reflect reinvestment of dividends and distributions. Investing entails risks, including possible loss of principal.

This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Neuberger Berman is not providing this material in a fiduciary capacity and has a financial interest in the sale of its products and services. Investment decisions and the appropriateness of this material should be made based on an investor’s individual objectives and circumstances and in consultation with his or her advisors. This material may not be used for any investment decision in respect of any U.S. private sector retirement account unless the recipient is a fiduciary that is a U.S. registered investment adviser, a U.S. registered broker-dealer, a bank regulated by the United States or any state, an insurance company licensed by more than one state to manage the assets of employee benefit plans subject to ERISA, or, if subject to Title I of ERISA, a fiduciary with at least $50 million of client assets under management and control, and in all cases financially sophisticated, capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies. This means that “retail” retirement investors are expected to engage the services of an advisor in evaluating this material for any investment decision. If your understanding is different, we ask that you inform us immediately.

This material is presently solely for informational purposes and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Certain products and services may not be available in all jurisdictions or to all client types. The use of tools cannot guarantee performance. Diversification does not guarantee profit or protect against loss in declining markets. As with any investment, there is the possibility of profit as well as the risk of loss. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Unless otherwise indicated, returns shown reflect reinvestment of dividends and distributions. Past performance is no guarantee of future results.

Options involve investment strategies and risks different from those associated with ordinary portfolio securities transactions. By writing put options, an investor assumes the risk of declines in the value of the underlying instrument and the risk that it must purchase the underlying instrument at an exercise price that may be higher than the market price of the instrument, including the possibility of a loss up to the entire strike price of each option it sells but without the corresponding opportunity to benefit from potential increases in the value of the underlying instrument. The investor will receive a premium from writing options, but the premium received may not be sufficient to offset any losses sustained from exercised put options.

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