Deconstructing Target Retirement Date Funds. Western Pension & Benefits Conference Fall Seminar November 13, 2013

Transcription

1 Deconstructing Target Retirement Date Funds Western Pension & Benefits Conference Fall Seminar November 13, 2013

2 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

3 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% % 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

4 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

5 What are Target Retirement Date Funds? Diversified investment portfolios whose allocation between funds and asset classes automatically becomes more conservative over time. 100% Target Retirement Date Funds: Sample Glide Path 80% 60% 40% 20% 0% Income US Equities Non US Equities Fixed Income Inflation Related Cash 4

6 Characteristics of Pre Packaged TRD Funds Advantages Participants can set it and forget it Professional allocation management Asset class diversification Automatic rebalancing Allocation varies based on age, becomes increasingly conservative as retirement approaches Disadvantages Glide path is based on average participant so may not satisfy the investment needs of all participants No ability to change poor underlying funds Additional education may be needed Potentially better returns 5

7 TRD Funds Offer a Potential Return Advantage Three year return experience of participants on one national recordkeeping platform ( ): Source: JP Morgan. 6

8 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

9 Largest Target Retirement Date Fund Suites As of December 31, 2012: Fund Family Share of TRD Mutual Fund Market 76% of market with top three providers Fidelity Vanguard T. Rowe Price 17% 26% 32% Principal Wells Fargo American Funds TIAA CREF John Hancock J.P. Morgan American Century 4% 3% 3% 3% 2% 2% 1% (Remainder) 7% Source: Morningstar. 8

10 Composition of TRD Funds Industry Average Target Date Glide Path: Equity Allocation Source: Morningstar. 9

11 Asset Allocation of TRD Funds Current Allocation of Top Ten Providers 2030 Funds 42% 54% Fidelity 13% 28% 9% 29% Vanguard T. Rowe Price 2% 11% 1% 5% Principal Wells Fargo American Funds TIAA CREF John Hancock J.P. Morgan Cash US Stock Non US Stock Bond Other American Century Source: Morningstar. 10

12 Asset Allocation of TRD Funds Return & Risk of Top Ten 2030 Funds Current Allocation, Based on History (30 Years): 30-Year Arithmetic Return (%) American Funds Principal John Hancock TIAA-CREF Vanguard JP Morgan American Century Wells Fargo S&P Target Date 2030 Index T. Rowe Price Fidelity Year Risk (Std. Deviation) (%) Source: Morningstar. 11

13 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: Expected Arithmetic Return (%) Fidelity Wells Fargo JP Morgan T. Rowe Price American Century Principal S&P Target Date 2030 Index American Funds Vanguard John Hancock TIAA-CREF Expected Risk (Std. Deviation) (%) Source: Morningstar, Sellwood Consulting. 12

14 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

15 Glidepath Instability Source: Morningstar. 14

16 Glidepath Instability Source: Morningstar. 15

17 Composition of TRD Funds: Fees Average Expense Ratios for TRD Funds, : 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 1.04% 1.03% 1.02% 0.99% 0.91% % of Industry Indexed (right scale) 0.00% 0% % 40% 30% 20% 10% Source: Morningstar. Average expense ratio is asset weighted. 16

18 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 Number of TRD funds investing in emerging markets bonds has increased by 50% since Unbundling the TRD Suite from the Recordkeeper Custom TRD funds Source: Morningstar. 17

19 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 forwardlooking 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

20 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 Morningstar: Target Date Series Research Paper 2013 Survey (at Bait and Switch: Glide Path Instability (at /IBBAssociates/Bait_and_Switch_Glide_Path_Stability_Final_ pdf) Vanguard: How America Saves 2013 (at J.P. Morgan: 2013 Defined Contribution Plan Sponsor Survey Findings (at &UserFriendlyURL=contentdet_module&smID= ) Janus: Trends in Target Date Funds (at 19