What does a liability glide path specify for a plan sponsor?

A liability glide path is a strategic framework used by plan sponsors to manage their investment portfolios in relation to their liabilities over time. The correct answer highlights the importance of balancing two types of assets: liability-hedging assets, which help mitigate the risk of changes in interest rates affecting the present value of future liabilities, and return-seeking assets, which aim to generate higher returns to fund those liabilities over the long term.

A liability glide path typically defines the proportion of these two asset classes throughout the life of the plan, aligning the investment strategy with the changing risk profile as the plan’s liabilities evolve. As the plan matures, a sponsor may increasingly shift towards more stable, liability-hedging investments to reduce overall risk and ensure that the plan can meet its obligations. This gradual shift reflects a methodical approach to risk management, ensuring that as the time horizon shortens, the focus on stability and matching liabilities intensifies.

In contrast, while the other options provide relevant information regarding investment strategies, they do not specifically address the primary focus of a liability glide path. For example, the rate of return on investments relates to expected performance rather than the specific management of liabilities. The duration of investment holdings and the types of investments in a portfolio are tactical considerations that