Deconstructing Target Retirement Date Funds Western Pension & Benefits Conference Fall Seminar November 13, 2013
Outline • Why Target Retirement Date (TRD) Funds Matter • Historical Perspective • What are Target Retirement Date Funds? • Overview of TRD Funds in the Marketplace • Characteristics of TRD Funds • Composition of TRD Funds • Current Trends • Best Practices & Conclusions 1
Why TRD Funds Matter TRD funds are relatively new but already dominant. • 65% of plans across the country offer TRD funds. • On one large recordkeeping platform: • 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 % of Plans Offering TRD % of Participants Using TRD Of plans that offer a default option, 90% use a TRD suite as the default. • There is a wide disparity of quality and cost among TRD funds. • Source: PSCA, Vanguard, Janus. 2
Historical Perspective Evolution of diversified, multi ‐ asset portfolios parallels the evolution of • defined benefit to defined contribution plans. Defined Benefit Defined Contribution Aggregated Participant Individualized Participant Characteristics Characteristics Single Allocation Changing Allocations Plan Sponsor Liability Participant Responsibility Balanced Products Target Date Products Default investment popularity has shifted from investment options • appropriate for groups of participants to those for individual participants. 3
What are Target Retirement Date Funds? Diversified investment portfolios whose allocation between funds and • asset classes automatically becomes more conservative over time. Target Retirement Date Funds: Sample Glide Path 100% 80% 60% 40% 20% 0% 2060 2055 2050 2045 2040 2035 2030 2025 2020 2015 2010 Income US Equities Non US Equities Fixed Income Inflation ‐ Related Cash 4
Characteristics of Pre ‐ Packaged TRD Funds Advantages Disadvantages Participants can “set it and forget it” Glide path is based on “average” • • participant so may not satisfy the Professional allocation management investment needs of all participants • Asset class diversification No ability to change poor underlying • • funds Automatic rebalancing • Additional education may be needed • Allocation varies based on age, • becomes increasingly conservative as retirement approaches Potentially better returns • 5
TRD Funds Offer a Potential Return Advantage Three ‐ year return experience of participants on one national • recordkeeping platform (2010 ‐ 2012): Source: JP Morgan. 6
Overview of TRD Funds in the Marketplace The Pension Protection Act of 2006 (“PPA”) designated four types of • investments as QDIAs that give the plan sponsor special fiduciary protection. – Target Retirement Date funds fall into this category Approximately $500 billion is invested in TRD Funds (as of 2012). • Majority of inflows going to indexed products. • Source: Morningstar. 7
Largest Target Retirement Date Fund Suites As of December 31, 2012: Fund Family Share of TRD Mutual Fund Market 76% of Fidelity 32% market with Vanguard 26% top three providers T. Rowe Price 17% Principal 4% Wells Fargo 3% American Funds 3% TIAA ‐ CREF 3% John Hancock 2% J.P. Morgan 2% American Century 1% (Remainder) 7% Source: Morningstar. 8
Composition of TRD Funds Industry Average Target ‐ Date Glide Path: Equity Allocation • Source: Morningstar. 9
Asset Allocation of TRD Funds Current Allocation of Top Ten Providers’ 2030 Funds 42% ‐ 54% Fidelity Vanguard 13% ‐ 28% 9% ‐ 29% T. Rowe Price Principal Wells Fargo American Funds 2% ‐ 11% TIAA ‐ CREF 1% ‐ 5% John Hancock J.P. Morgan American Century Cash US Stock Non ‐ US Stock Bond Other Source: Morningstar. 10
Asset Allocation of TRD Funds Return & Risk of Top Ten 2030 Funds’ Current Allocation, Based on History (30 Years): 12.0 American Funds Principal 11.0 John Hancock TIAA-CREF Vanguard JP Morgan Wells Fargo American Century S&P Target Date 2030 30-Year Arithmetic Return (%) 10.0 Index T. Rowe Price Fidelity 9.0 8.0 7.0 6.0 5.0 10 11 12 13 14 15 16 17 18 30-Year Risk (Std. Deviation) (%) Source: Morningstar. 11
Asset Allocation of TRD Funds Expected Return & Risk of Top Ten 2030 Funds’ Current Allocation, based on Sellwood Consulting Forward ‐ Looking 10 ‐ Year Capital Market Assumptions: 12.0 11.0 Expected Arithmetic Return (%) 10.0 9.0 8.0 American Funds Vanguard Principal John Hancock 7.0 JP Morgan TIAA-CREF Wells Fargo S&P Target Date 2030 T. Rowe Price 6.0 Index American Century Fidelity 5.0 10 11 12 13 14 15 16 17 18 Expected Risk (Std. Deviation) (%) Source: Morningstar, Sellwood Consulting. 12
Asset Allocation Doesn’t Tell the Whole Story Three ‐ Year Rolling Equity Beta of Ten Largest 2030 Funds Equity beta measured vs. the Russell 3000 Index. Performance history for T. Rowe Price Target Retire 2030 is not available. 13
Glidepath Instability Source: Morningstar. 14
Glidepath Instability Source: Morningstar. 15
Composition of TRD Funds: Fees Average Expense Ratios for TRD Funds, 2008 ‐ 2012: • 1.20% 1.04% 1.03% 1.02% 50% 0.99% 0.91% 1.00% 40% 0.80% 30% 0.60% 20% % of Industry Indexed 0.40% (right scale) 10% 0.20% 0.00% 0% 2007 2008 2009 2010 2011 2012 2013 Source: Morningstar. Average expense ratio is asset ‐ weighted. 16
Current Trends Indexing • – For the first time in 2012, inflows to indexed target ‐ date funds exceeded those to actively managed target ‐ date funds – Some actively managed target ‐ date funds adopting indexed strategies within their funds Global Allocations • – Average equity allocation to non ‐ US stocks has risen from 24% in 2005 to 36% today. – Number of TRD funds investing in non ‐ US bonds has increased by 33% since 2008. Number of TRD funds investing in emerging markets bonds has increased by 50% since • 2008. Unbundling the TRD Suite from the Recordkeeper • Custom TRD funds • Source: Morningstar. 17
Best Practices & Conclusions Keep in mind who these products are designed for: participants without the • expertise or interest in designing their own retirement portfolios. – Places burden of monitoring the funds on the plan sponsor. Monitoring is essential, especially of active TRD suites. • – Allocations can change – Portfolio managers can leave – Limited ability to make changes to components of TRD funds (Good) TRD funds offer ideal default options. • Choose a provider whose glide path allocation makes sense based on forward ‐ • looking expectations, not on history. Negotiate with your recordkeeper (59% of plans using a TRD suite use the • proprietary suite of their recordkeepers). Educate participants about TRD funds. • 18
Further Reading & Sources Cited Sellwood Consulting: • Five Common Mistakes 401(k) Plan Sponsors Make – (at sellwoodconsulting.com) Profit Sharing Council of America (PSCA): • 56 th Annual Survey of Profit Sharing and 401(k) Plans – (available for purchase at www.psca.org) Morningstar: • Target ‐ Date Series Research Paper 2013 Survey – (at http://corporate.morningstar.com/us/documents/ResearchPapers/2013TargetDate.pdf) Bait and Switch: Glide Path Instability – (at http://corporate.morningstar.com/ib/documents/MethodologyDocuments /IBBAssociates/Bait_and_Switch_Glide_Path_Stability_Final_091211.pdf) Vanguard: • How America Saves 2013 – (at https://pressroom.vanguard.com/nonindexed/2013.06.03_How_America_Saves_2013.pdf) J.P. Morgan: • 2013 Defined Contribution Plan Sponsor Survey Findings – (at https://www.jpmorganfunds.com/cm/Satellite?pagename=jpmfVanityWrapper &UserFriendlyURL=contentdet_module&smID=1323364619060) Janus: • Trends in Target ‐ Date Funds – (at http://bit.ly/1cGwt7w) 19
Recommend
More recommend
