From the Field
Understanding the substitution effect
Glide path evaluation may need nuanced cost equivalency analysis.
2024-05-02 09:38
Justin Harvey, ASA, CFA, Head of Analysis, Multi‑Asset Solutions
Adam Langer, CFA, Senior Quantitative Investment Analyst
James Tzitzouris, Ph.D., Director of Research, Retirement
Key Insights
  • Finite sponsor budgets can require benefit trade‑offs. As such, defined benefit (DB) plans are often substitutes for richer defined contribution (DC) plans.
  • Glide path suitability assessments should reflect this implicit trade‑off. Modeling it requires equating a DB plan with a similarly rich DC plan.
  • Lower‑equity glide paths may be suitable for DC plans paired with DB plans. But equity levels should remain high enough to reflect the substitution effect.

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