Research Insights: A Behavioral Approach to Investing for Retirement with Target Date Funds

Transcription

1 Research Insights: A Behavioral Approach to Investing for Retirement with Target Date Funds Marc Pester, Senior Vice President, Prudential Retirement Mike Rosenberg, Senior Vice President, Prudential Investments

2 FINANCIAL LITERACY AND RETIREMENT READINESS Financial literacy - a serious challenge to the ability of most Americans to achieve financial security More than 1/3 of working age Americans and retirees lack basic investing and retirement saving knowledge Very few have a good grasp of fundamental concepts of economics and finance Gaps are even more pronounced with women and millennials Source: Baby Boomers Approach 65 Glumly, Pew Research Center Publications, 12/20/

3 INVESTOR BEHAVIOR BIASES: THE CHALLENGE LAB I might live how long? How longevity changes everything about how we prepare for the future. I ll do it later How to get over procrastination and get ready for our future. It won t happen to me How understanding risk can help us prepare for the unexpected. I just can t resist How emotions affect our decisions, and how we can control them. I want it now How resisting short-term impulses can lead to long-term gratification. 3

4 INVESTOR BEHAVIOR BIASES: THE FUZZY LOGIC EXPERIMENT TOO MUCH CHOICE 4

5 INVESTOR BEHAVIOR BIASES: ADDRESS EGO DEPLETION Biggest threats to successfully retiring come in the form of attitudes such as: Procrastination Too much pessimism or optimism Uncertainty Hopelessness Hopelessness I should be doing more to prepare for a secure retirement but I simply don t know how/what to do 35% 42% 42% 40% 27% 27% 26% Total US Male Female More literate Less literate Affluent Less affluent Source: The Prudential Retirement Financial Literacy and Retirement Readiness Study. Q

6 INVESTOR INSIGHTS: THE BENEFIT OF HINDSIGHT Reflecting on their experience, words of wisdom retirees have for non-retirees: Start earlier Save more Retire later Things Retirees Wish They Had Done Differently Saved more 68% Started saving earlier 59% Retired later 33% Invested more aggressively Maximized benefits of employer ret plan Asked for more advice Consulted a financial advisor Studied financial products options more Invested more conservatively Communicated more with my spouse/partner about ret goals 14% 12% 12% 10% 9% 6% 4% Source: The Prudential Retirement Financial Literacy and Retirement Readiness Study. Q

7 INVESTORS TOP CONCERNS: LONGEVITY Top financial priorities: not run out of money in retirement afford medical/health care in retirement have income to maintain desired retirement lifestyle 7

8 RESPONDING TO THE RETIREMENT READINESS CHALLENGE Each day, 10,000 Baby Boomers reach age 65, many of whom are unprepared to retire* Our goal is to help Americans successfully reach their Day One of retirement and be prepared for 30+ years of it CHALLENGES FACING INVESTORS Increasing longevity means a greater risk of investors outliving their retirement assets Satisfying the need for income in retirement Balancing the need for asset growth with risk management as investors age Finding an investment mix to enhance longterm performance Keeping investment costs low Making it less complex and keeping investors engaged *Source: Baby Boomers Approach 65 Glumly, Pew Research Center Publications, 12/20/

9 RESEARCH DRIVES GLIDE PATH CONSTRUCTION

10 RESEARCH-DRIVEN APPROACH 85 years of expertise in the retirement business managing pension and defined contribution plans* Deep understanding of capital markets and investor behavior biases Ongoing extensive research and analysis of actual savings rates and employer contributions from more than 850,000 Prudential Retirement plan participants Insights from the research How it influenced glide path A married couple may need income for 30 years of retirement.** Use a through glide path and model life expectancy to age 95 Exposure to equities early in an investor s career is key. Allocation to equity and non-traditional strategies is high early in the glide path Significant losses late in workers careers can seriously jeopardize their ability to retire. Steeper glide path slope switching from equity to fixed income to help lower overall portfolio volatility during the Retirement Red Zone the 10 years before and after retirement. Controlling investment expenses is critical. Core of passive index funds complemented by a satellite of actively managed strategies offers a cost-effective approach. Non-traditional investments and TIPS can potentially boost return and reduce volatility. Exposure to commodities and private real estate, as well as TIPS, can offer significant risk/return benefits. * Source: Prudential Retirement. **Source: Society of Actuaries Committee. "The Impact of Running Out of Money in Retirement". November

11 RESEARCH-SHAPED GLIDE PATH DESIGN At 10 years prior to the retirement date, we incorporate the Retirement Red Zone concept into our glide path. At this point, we begin to significantly shift from riskier assets to more conservative ones. Because addressing longevity risk is so important, the glide path starts with a 97% allocation to domestic and foreign equities, commodities and real estate to provide potential for growth. As the plan participant ages, equity exposure decreases. Because of the through retirement glide path, the exposure to equities continues to decrease in retirement to provide additional protection against equity market declines. This allocation stabilizes 10 years after retirement at 26% equities, 9% commodities and real estate, and 65% fixed income. The target date is the approximate date when investors plan to start withdrawing their money. The asset allocation of the target date funds will become more conservative as the target date approaches by lessening equity exposure and increasing exposure in fixed income investments. The principal value of an investment in a target date fund is not guaranteed at any time, including the target date. The asset allocation changes over time. Prudential Retirement Insurance and Annuity Company, together with QMA, may make changes to the intended percentage allocations. 11

12 DIVERSIFICATION WITH A PURPOSE Risk- Controlled Active Equity Large Cap Mid Cap Emerging Markets Non- Traditional Real Estate Commodities Passive Core S&P 1500 Index Russell Developed Ex-U.S. Index Fundamental Active Equity Small Cap Fixed Income Core Bond TIPS Short-Term Bond Equity exposure across market capitalizations and geography helps provide access to a broad opportunity set. Use of passive and active equity strategies further diversifies and helps provide optimization and balance. Fixed income asset classes help provide stability, which is particularly important as the target date approaches. Non-traditional asset classes real estate and commodities as well as Treasury Inflation- Protected Securities (TIPS), offer a low correlation to stocks and bonds and have the potential to help both moderate portfolio risk and boost returns. 12

13 IN PLAN INCOME OPTIONS

14 SOLVING FOR MARKET AND LONGEVITY RISK For illustrative use only; this example is hypothetical and does not represent any actual Prudential investment product. Guarantees are based on the claims-paying ability of the insurance company and are subject to certain limitations, terms, and conditions. The benefit base (Income Base) is only available through withdrawals. It is not available as cash or a lump sum. IncomeFlex has an additional fee of 1% percent for the increased protection it provides. The fee pertains only to the dollars invested in IncomeFlex funds and is assessed in the same way as standard investment management fees. Assumed retirement age of

15 IMPROVING THE LIKELIHOOD OF POSITIVE OUTCOMES 1. Saving behavior: Providing an in-plan guaranteed income option correlates with participants contributing more than average 401(k) plan participants contribute 2. Investing behavior: Nearly three out of four said guaranteed income would make them more likely to stay the course 3. Spending behavior: Guaranteed income participants may exceed a 4% safe withdrawal strategy with protection Source: The Prudential Retirement Financial Literacy and Retirement Readiness Study. Q

16 DISCLOSURES Prudential IncomeFlex Target These benefits are provided through Prudential IncomeFlex Target, which is consistently referred to herein as IncomeFlex Target. If elected, certain GoalMaker portfolios also allow an allocation to IncomeFlex Target Funds. To maintain the IncomeFlex Target benefit, you must invest in an IncomeFlex Target Fund. Like all variable investments, these funds may lose value. Withdrawals in excess of the Lifetime Annual Withdrawal Amount will reduce future guaranteed withdrawals proportionately. Prudential IncomeFlex Target Funds are separate accounts available under group variable annuity contracts issued by Prudential Retirement Insurance and Annuity Company (PRIAC),Hartford, CT. PRIAC does not provide any guarantee of the investment performance or return of contributions to those separate accounts. PRIAC s guarantee of certain withdrawals is supported by PRIAC s general account and is contingent on its claims paying ability. You should consider the objectives, risks, charges, and expenses of the funds and guarantee features. For this and other information, please access the participant website or call PRU-2100( ) for a copy of the Prudential IncomeFlex Target Important Considerations prior to investing. Product availability and terms may vary by jurisdiction and product version. Subject to regulatory approvals. Annuity contracts contain exclusions, limitations, reductions of benefits and terms for keeping them in force. Contract form #GA-2020-TGWB or state variations thereof. Keep in mind that application of asset allocation and diversification concepts does not ensure a profit or protect against loss in a declining market. It is possible to lose money by investing in securities. Retirement products and services are provided by Prudential Retirement Insurance and Annuity Company (PRIAC), Hartford, CT, a Prudential Financial company. Prudential Retirement's group variable annuity contracts are issued by PRIAC, Hartford, CT, a Prudential Financial company Prudential Financial, Inc. and its related entities. Prudential, the Prudential logo, the Rock symbol and Bring Your Challenges are service marks of Prudential Financial, Inc., and its related entities, registered in many jurisdictions worldwide

17 DISCLOSURES Prudential IncomeFlex Target These benefits are provided through Prudential IncomeFlex Target, which is consistently referred to herein as IncomeFlex Target. If elected, certain GoalMaker portfolios also allow an allocation to IncomeFlex Target Funds. To maintain the IncomeFlex Target benefit, you must invest in an IncomeFlex Target Fund. Like all variable investments, these funds may lose value. Withdrawals in excess of the Lifetime Annual Withdrawal Amount will reduce future guaranteed withdrawals proportionately. Prudential IncomeFlex Target Funds are separate accounts available under group variable annuity contracts issued by Prudential Retirement Insurance and Annuity Company (PRIAC),Hartford, CT. PRIAC does not provide any guarantee of the investment performance or return of contributions to those separate accounts. PRIAC s guarantee of certain withdrawals is supported by PRIAC s general account and is contingent on its claims paying ability. You should consider the objectives, risks, charges, and expenses of the funds and guarantee features. For this and other information, please access the participant website or call PRU-2100( ) for a copy of the Prudential IncomeFlex Target Important Considerations prior to investing. Product availability and terms may vary by jurisdiction and product version. Subject to regulatory approvals. Annuity contracts contain exclusions, limitations, reductions of benefits and terms for keeping them in force. Contract form #GA-2020-TGWB or state variations thereof. Keep in mind that application of asset allocation and diversification concepts does not ensure a profit or protect against loss in a declining market. It is possible to lose money by investing in securities. Retirement products and services are provided by Prudential Retirement Insurance and Annuity Company (PRIAC), Hartford, CT, a Prudential Financial company. Prudential Retirement's group variable annuity contracts are issued by PRIAC, Hartford, CT, a Prudential Financial company Prudential Financial, Inc. and its related entities. Prudential, the Prudential logo, the Rock symbol and Bring Your Challenges are service marks of Prudential Financial, Inc., and its related entities, registered in many jurisdictions worldwide