Wells Fargo Expands Investment Solutions

Wells Fargo Institutional Retirement and Trust introduced Target My Retirement, a more personalized investment product for its 401(k) plan sponsors and participants.

Target My Retirement builds on the target-date approach to investment allocation through the addition of more personal information about the investor, including an individual’s current financial and demographic information. Like a target-date fund, Target My Retirement is cost-effective and can be used as a plan’s qualified default investment alternative (QDIA).

Wells Fargo chose Morningstar Associates, a registered investment adviser and part of Morningstar’s Investment Management group, as the independent financial firm that will advise and construct the portfolios for those participants who choose or are defaulted into Target My Retirement in their 401(k) plan. 

The company says its analysis of the market points to a competitive price relative to a broad set of actively managed institutional target-date funds (on average), especially in light of the added value of broader fund selection, non-proprietary model (e.g., independence of Morningstar in developing the model) and individual investment strategy.

“Not everybody in an age band is the same, and Target My Retirement allows participants to craft a more personalized approach within their 401(k) plan,” says Joe Ready, head of Wells Fargo Institutional Retirement and Trust. “Creating a plan for retirement is a journey over many years and with technology, we are at a place where we can do better than offer a one-size-fits-all approach to planning.”

While Target My Retirement uses the managed account engine “behind the scenes” to provide the personalization, in terms of the participant experience, it offers the straightforward, easily understood approach of a target-date product, Ready tells PLANSPONSOR. Even if participants don’t provide information about outside assets, the solution offers the same ease-of-use of a target-date fund with the added benefit of a more personalized investment glidepath.

The investment solution allocates contributions and existing account balances to create a customized investment portfolio that targets an 80% income replacement goal post-retirement for participants. While the allocation starts with the participant’s age and expected retirement date, it is further customized using the individual’s gender, account balance, salary level and contribution rate, automatically applied using 401(k) plan data without the participant having to provide any additional data or do any extra work. In addition, Target My Retirement integrates expected Social Security benefits into the portfolio analysis and offers participants the ability to add outside asset information to create a more holistic view.

Participants can select any target retirement date, as opposed to having to select a standard, five-year target-date increment, and can change their target retirement year at any time. Based on the year selected, Target My Retirement will rebalance the participant’s portfolio to a revised allocation. The service offers investment choices that include a mix of well-diversified asset managers using mutual funds and collective funds. A plan sponsor can also opt to use the investment lineup already selected for the 401(k) plan.

Where traditional target-date funds typically support a limited number of age-based portfolios (e.g., 10) along a proprietary glidepath, Target My Retirement currently supports significantly more glidepath scenarios. Each scenario provides a more personalized glidepath for the participant to better reflect the participant’s goals and situation.

“We’re pleased to be able to offer more options to strengthen and support investing for retirement,” says Ready.

Wells Fargo Asset Management has introduced the Wells Fargo Dynamic Target Date Funds, an investment that offers a new approach designed to help retirement plan participants reach the recommended 80% income replacement goal post-retirement.

“In the years leading up to retirement, a glide path arguably needs to be aggressive enough to meet the participant’s investment goals, yet also be conservative enough to hedge against market losses, particularly close to retirement," says Ron Cohen, head of defined contribution distribution for Wells Fargo Funds Management, LLC. "But it’s difficult for a standard glide path to be both aggressive and conservative at the same time. Wells Fargo Asset Management has developed a new approach that is intended to address this challenge.:

In addition to creating a broadly diversified portfolio with enough equity exposure to help participants achieve their target goal, portfolio managers Christian Chan and Kandarp Acharya employ a set of institutional-caliber risk management techniques that include tactical asset allocation and a patent-pending dynamic risk management approach.

Chan explains that Wells Fargo uses three active risk management techniques to help manage the portfolios during times of volatility while also allowing the managers to opportunistically pursue compelling investment opportunities:

• A proprietary tactical asset allocation model that allows the managers to pursue market opportunities and create the potential to generate additional excess returns in a risk-conscious manner;
• A set of volatility management tools that help moderate the impact of short-term market gyrations, particularly within the equity exposure; and
• A tail risk management overlay strategy that strives to improve participant outcomes by managing excessive volatility and the risk of large, unpredictable downside events.

“Because plan participants reach retirement during different market conditions,” says Chan, “it’s key to have the tools to moderate short-term volatility and limit the impact of sudden, unexpected market losses. Our process allows us to do just that.”

In its analysis of the target-date fund universe, Wells Fargo simulated the retirement savings experience of the average individual investor using 5,000 unique investment return scenarios. It based investor savings behavior (during their assumed working years) and asset allocation on a combination of industry statistics and assumptions, including but not limited to:

• Forty working years from age 25 to 65;
• A variable salary growth rate greater in early working years and slightly negative as retirement approaches;
• Increasing savings rates consistent with industry data;
• Social Security contribution to income replacement at 75% of the value dictated by the Social Security Administration’s quick calculator; and
• Approximation for the industry average target-date fund glide path (sourced from a 2014 Morningstar target-date report).

Wells Fargo then recorded the participant’s results for each glide path pertaining to his/her:

• Average ending wealth (at age 65) observed over those 5,000 simulations;
• The average instance of shortfall; and
• The average shortfall per occurrence.

The target date represents the year in which investors may likely begin withdrawing assets. The funds gradually seek to reduce market risk as the target date approaches and after it arrives by decreasing equity exposure and increasing fixed-income exposure. The principal value is not guaranteed at any time, including at the target date.

The Wells Fargo Dynamic Target Date Funds are available in five share classes: A, C, R, R4, and R6. Funds are offered in five-year increments from 2015 through 2060, as well as a Dynamic Target Today Fund. The series’ glide path continues to reduce risk for 10 years after the target date before reaching its landing point.

For more information about the Wells Fargo Dynamic Target Date Funds, go to http://wellsfargoadvantagefunds.com or call 800-368-1790.