Target-Date Fund Shortfalls Not the Reason Americans Face Retirement Crisis
FAIRPORT, NY, November 9, 2009 -- "There is certainly room for improvement in the design, transparency, disclosure, education, and fees associated with target date funds. However, the differences in target date funds' glide paths, and even their inability to fully shelter investors from the near collapse of the U.S. financial system, are not the primary reasons that the typical American household is facing a significant retirement income shortfall," says Patrick Cunningham, Managing Director with Manning & Napier Advisors, Inc.
The Senate's Special Committee on Aging ("the Committee") held a hearing on Wednesday, October 28, 2009 titled, "Default Nation: Are Target Date Funds Missing the Mark?" and also released the Aging Committee Majority Staff Information paper entitled, "Target Date Retirement Funds: Lack of Clarity Among Structures and Fees Raise Concerns." The Committee's report recognized that target date funds "offer investors certain advantages generally not offered by other types of investment vehicles" and that "well-constructed target date funds have great potential for improving retirement income security." However, the Committee also has identified concerns regarding design, transparency, and fees of target date funds.
What Do the Committee's Concerns Stem From?
"The Committee's concerns regarding target date design seem to be based on the significant differences in asset allocation and investment performance amongst the various providers of 2010 target date funds, as well as the sizeable losses experienced by many 2010 funds in 2008. It really should not come as a surprise that various investment managers have different perspectives on what securities should be owned, in what percentages, and in what environments. Part of what makes the stock market function is that different investors have different perspectives," says Cunningham.
"If everyone had the same outlook and perspective, there would be no one to purchase from or sell to. Were 2008's asset allocation and performance differences between target date funds really any greater than the differences between stock funds, bond funds, or any other investment category? Plus, is looking at one-year short-term performance in the midst of the worst bear market since the Great Depression a prudent time period to evaluate the merits of any investment strategy? Did any diversified investment strategy offering the potential for returns in excess of today's low yields offer investors a safe haven in 2008? How have the 2010 target date funds performed during 2009's stock market rally?"
What Does Need to Change in the Lifecycle Industry?
Cunningham states, "we agree with the Committee's view that plan sponsors and participants need better transparency and disclosure to understand a target date fund provider's glide path approach and investment disciplines. Several studies have shown that less than one-in-five participants using a target date fund is using the fund properly (i.e., allocating the vast majority of their assets to the target date fund). Clearly, more education on the role target date funds should play in a participant's investment program, including disclosure about the fund's glide path assumptions is needed."
"The Committee also raised the issue of some target date fund providers including low performing funds to increase assets under management. As a firm whose target date funds include at most two underlying funds, we can not speak to the motivations behind other firm's inclusion of numerous proprietary funds. However, we believe the more important issue regarding the use of a high number of underlying funds is that the practice can lead to over-diversification and an inefficient portfolio design that may lead to index-like returns less than the value-added fees charged by the various funds."
"The Committee's concerns regarding fees reinforces that costs should always be evaluated and plan fiduciaries are charged with making sure that the fees paid are in line with the benefits received. The Committee needs to be careful to avoid mistaking low fees for the best value proposition. At least in the case of mutual funds, plan sponsors can make this assessment more easily since mutual fund performance is reported net of fees, allowing for an apples-to-apples comparison."
Where Have Target Date Funds Succeeded?
"In looking for ways to improve target date funds, the Committee should be careful to avoid placing the blame for the nation's broader retirement savings problems and the worst bear market since the Great Depression on a relatively new investment approach that only recently has started to gain wide-spread acceptance in 401k plans," says Cunningham.
"Target date funds were developed to offer a simple, straightforward investment solution for participants that lacked the time, knowledge, or inclination to make asset allocation and investment decisions. They were designed to offer participants a diversified portfolio to avoid the most common and dangerous investment pitfalls, namely investing too conservatively at a young age, investing too aggressively as retirement approaches, and concentrating too much wealth in employer stock. On these criteria, it seems like most target date funds have been successful in providing investors with better results than they would have earned on their own, even during the worst investment environment in history of 401k plans."
"While target date funds can and should play an important part in helping investors secure a dignified standard of living in their retirement years, no investment solution alone can overcome low participation rates and perhaps more important, low contribution rates. Unfortunately, even with the positive trend towards auto enrollment following passage of the Pension Protection Act, approximately 1 in 4 people with access to a retirement plan do not participate in their plan. Furthermore, nearly half of the participants that do participate contribute 5% or less per year and the Pension Protection Act's 3% safe harbor minimum initial deferral rate is unlikely to allow even dedicated savers who start early in their careers to accumulate the assets needed to support a comfortable retirement."
About Manning & Napier Advisors, Inc.
Manning & Napier Advisors, Inc. is headquartered in Fairport, New York and employs more than 300 full-time employees. The firm, a leader in lifecycle investing, has been a registered investment advisor since 1970 and manages over $20 billion in client assets as of September 30, 2009.
###
Click here for more material dealing with current trends, opinion, news, legislative action, investments, marketing, sales, consulting, and legal issues on 401k plans.
This is a press release provided by the company or its representatives. 401khelpcenter.com, LLC is not the author of this release and is not associated or affiliated with any firm or organization mentioned unless otherwise noted. Use of any information obtained from this release is voluntary, and reliance on it should only be undertaken after an independent review of its accuracy, completeness, efficacy, and timeliness. Reference to any specific commercial product, process, or service by trade name, trademark, service mark, manufacturer, or otherwise does not constitute or imply endorsement, recommendation, or favoring by 401khelpcenter.com, LLC.
