Target Risk vs. Target Date Funds in 401(k) Plans: Maybe the answer - - PowerPoint PPT Presentation

Target Risk vs. Target Date Funds in 401(k) Plans: Maybe the answer is both

January 14, 2015

Outline

• What are Target Risk Funds?
• What are Target Retirement Date (TRD) Funds?
• Plan Adoption Trends: Target Risk vs. TRD
• Are Target Risk Funds Obsolete?
• Conclusions

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Target Risk Funds

Conservative

US Equities Non US Equities Fixed Income Cash Inflation‐Related

Moderate

US Equities Non US Equities Fixed Income Inflation‐Related

Growth

US Equities Non US Equities Fixed Income

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Target Risk Funds

Advantages

• Professional allocation management
• Diversification
• Automatic rebalancing
• Static allocation ‐ appropriate if risk

profile remains unchanged

Disadvantages

• No ability to change poor underlying

funds (if prepackaged)

• Requires investor to assess risk profile
• Static allocation – inappropriate if risk

profile changes

4

Target Retirement Date (TRD) Funds

0% 20% 40% 60% 80% 100%

Target Retirement Date Funds: Sample Glide Path

US Equities Non US Equities Fixed Income Cash Inflation‐Related

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Target Retirement Date (TRD) Funds

Advantages

• “Set it and forget it”
• Professional allocation management
• Diversification
• Automatic rebalancing
• Allocation varies by proximity to

retirement age – appropriate if risk profile similar to “average” participant

Disadvantages

• Glide path is based on “average”

participant

• No ability to change poor underlying

funds (if pre‐packaged)

• Additional education may be needed
• Allocation varies by proximity to

retirement age – inappropriate if risk profile not similar to “average” participant

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Adoption Trend of Target Risk vs. TRD Funds

Sources: Vanguard, How America Saves 2014

51% 45% 41% 37% 33% 30% 29% 27% 25% 24% 13% 28% 43% 58% 68% 75% 79% 82% 84% 86% 6% 6% 8% 11% 14% 15% 17% 16% 16% 16% 0% 20% 40% 60% 80% 100%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Percentage of plans

Vanguard defined contribution plans

Target Risk Target-date Both

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Are Target Risk Funds Obsolete?

Pre-2006 2006-2008 2009-2014

New Role for Target Risk?

Pre- Mixed "Core" Menu Target Risk/Balanced US Equity US Equity US Equity US Equity US Equity US Equity US Equity US Equity US Equity US Equity Non‐US Equity Non‐US Equity Fixed Income Fixed Income Capital Preservation Pre‐Mixed Options Pre‐Mixed Options Target Retirement Suite US Equity US Equity US Equity US Equity US Equity US Equity US Equity US Equity US Equity US Equity Non‐US Equity Non‐US Equity Fixed Income Fixed Income Capital Preservation Target Retirement Suite US Equity US Equity US Equity US Equity US Equity Non‐US Equity Non‐US Equity Non‐US Equity Fixed Income Fixed Income Capital Preservation Fixed Income Inflation‐Related Pre‐Mixed Options Target Retirement Suite US Equity US Equity US Equity US Equity US Equity Non‐US Equity Non‐US Equity Non‐US Equity Fixed Income Fixed Income Capital Preservation Fixed Income Inflation‐Related Target Risk Model Portfolios 8

Conclusions

• TRD funds likely to remain the default option of choice
• Pre‐packaged target risk funds will continue to decline
• Target Risk model portfolios comprised of plan’s core options

can still play a valuable role

– Cost effective choice for participants wanting more customization than TRD funds but uncomfortable with the DIY approach – Leverages due diligence efforts for core options – Leverages asset allocation expertise of the plan’s advisor – DIY investors have a guidepost for how they might construct a conservative, moderate or growth oriented portfolio

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Sellwood Consulting LLC is an SEC‐registered investment advisor providing conflict‐ free investment consulting services to institutional clients and plan sponsors. Our firm is structured to provide industry‐leading investment advice, the highest levels of client service, and uncompromising ethics. Sellwood Consulting LLC kevinraymond@sellwoodconsulting.com 6650 SW Redwood Lane, Suite 370 Portland, Oregon 97224 (503) 596‐2880 Main www.sellwoodconsulting.com Kevin Raymond 10