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 2
Target Risk Funds Conservative Moderate Growth US Equities Non US Equities US Equities Non US Equities US Equities Non US Equities Fixed Income Cash Fixed Income Inflation ‐ Related Fixed Income Inflation ‐ Related 3
Target Risk Funds Advantages Disadvantages Professional allocation management No ability to change poor underlying • • funds (if prepackaged) Diversification • Requires investor to assess risk profile • Automatic rebalancing • Static allocation – inappropriate if risk • Static allocation ‐ appropriate if risk profile changes • profile remains unchanged 4
Target Retirement Date (TRD) Funds Target Retirement Date Funds: Sample Glide Path 100% 80% 60% 40% 20% 0% US Equities Non US Equities Fixed Income Cash Inflation ‐ Related 5
Target Retirement Date (TRD) Funds Advantages Disadvantages “Set it and forget it” Glide path is based on “average” • • participant Professional allocation management • No ability to change poor underlying • Diversification funds (if pre ‐ packaged) • Automatic rebalancing Additional education may be needed • • Allocation varies by proximity to Allocation varies by proximity to • • retirement age – appropriate if risk retirement age – inappropriate if risk profile similar to “average” profile not similar to “average” participant participant 6
Adoption Trend of Target Risk vs. TRD Funds Vanguard defined contribution plans 100% 86% 84% 82% 79% 80% 75% 68% Percentage of plans 58% 60% 51% 45% 43% 41% 40% 37% 33% 30% 29% 28% 27% 25% 24% 20% 17% 16% 16% 16% 15% 14% 13% 11% 8% 6% 6% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Target Risk Target-date Both Sources: Vanguard, How America Saves 2014 7
Are Target Risk Funds Obsolete? Pre-2006 2006-2008 2009-2014 New Role for Target Risk? Target Retirement Suite Pre ‐ Mixed Options Target Retirement Suite Pre ‐ Mixed Options Target Retirement Suite Pre ‐ Mixed Options Pre- Mixed Target Risk Model Portfolios Target Risk/Balanced US Equity US Equity US Equity US Equity US Equity US Equity US Equity US Equity US Equity US Equity US Equity US Equity 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 "Core" US Equity US Equity Non ‐ US Equity Non ‐ US Equity US Equity US Equity Non ‐ US Equity Non ‐ US Equity Menu US Equity US Equity Fixed Income Fixed Income US Equity US Equity Fixed Income Fixed Income Non ‐ US Equity Non ‐ US Equity Fixed Income Fixed Income Non ‐ US Equity Non ‐ US Equity Capital Preservation Capital Preservation Fixed Income Fixed Income Inflation ‐ Related Inflation ‐ Related Fixed Income Fixed Income Capital Preservation Capital Preservation 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 9
About Sellwood Consulting LLC 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. Contact Us Sellwood Consulting LLC 6650 SW Redwood Lane, Suite 370 Portland, Oregon 97224 (503) 596 ‐ 2880 Main www.sellwoodconsulting.com Kevin Raymond kevinraymond@sellwoodconsulting.com 10
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