Administration May 20, 2010

FRC Recommends Restructure of Target-date Funds

May 20, 2010 (PLANSPONSOR.com) - In a new study, “Rethinking Lifecycle Funds,” Financial Research Corporation says that while target-date funds are being marketed as a total retirement solution, the reality is that investors are using them as a small part of their overall retirement plan.
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In the study, FRC provides recommendations for product reconstruction, including:

  • Lower equity allocations;
  • Implement a “to retirement” glide path;
  • Market product as a core mutual fund to be used with satellite investments;
  • Match equity allocations to an investor’s stated risk tolerance; and
  • Change fund names to reflect risk levels.

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“Given that investors have a wide range of financial and nonfinancial unknowns—black box holdings—providers should lower risk levels and make target-date funds as transparent as target-risk funds to allow investors safer adoption of these funds into their overall portfolio,” states Lynette DeWitt, study author and director of lifecycle fund research at FRC, in a press release. “Firms who are able to reconstruct and market their products to align them more closely with the needs of today’s investors will be most likely to gain traction.”  

FRC estimates target-date funds will grow to $880 billion in assets by 2015, while target-risk funds grow to $300 billion, according to the announcement. Nearly 90% of the mutual fund marketplace is open for the growth of lifecycle funds or non-lifecycle funds.   

Given that target-risk funds provide better information on their risk levels, FRC recommends these funds as better options from a fiduciary protection standpoint.   

Based on two primary sources, the FRC IMPACT database and third-party research, including interviews conducted during the first quarter of 2010 with 12 fund managers (who collectively hold $300 billion in target-date and target-risk fund assets), the study takes a closer look at the myths and realities of target-date and target-risk funds. FRC also evaluates investors’ retirement planning behavior and use of target-date, target-risk, and balanced funds to provide insights to fund managers, plan sponsors, and advisers on how to improve their lifecycle fund product offerings and practices. 

Based on FRC data and analysis, the study reveals target-date firms who are best-positioned for future success. FRC further examines these firms’ approach to product, service, and delivery, and how they stack up against investors’ top considerations when choosing a target-date fund upon rollover.

FRC’s research can be purchased from http://www.frcnet.com.

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