Target-Date Funds Not a Total Retirement Solution
BOSTON, MA, May 20, 2010 -- Target-date funds are being marketed as a total retirement solution; however, the reality is that investors are using them as a small part of their overall retirement plan. In a new study, "Rethinking Lifecycle Funds," Financial Research Corporation (FRC) 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 advisors 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.
Findings are 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). FRC also analyzed data collected from DC recordkeepers, and additional retirement data sources.
"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. "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."
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
- Change fund names to reflect risk levels
Other key findings in this study include:
- FRC estimates target-date funds will grow to $880 billion in assets by 2015, while target-risk funds grow to $300 billion
- Nearly 90% of the mutual fund marketplace is open for the growth of lifecycle funds-or non-lifecycle funds, this represents the true opportunity to explore
- Given that target-risk funds provide better information on their risk levels, FRC recommends these funds as better options from a fiduciary protection standpoint
About Financial Research Corporation
For more than 20 years, Financial Research Corporation (FRC) has assisted marketing, product development, and strategic planning professionals in the creation of innovative products and services. Based in Boston, FRC is at the forefront of assisting the world's leading asset managers and distributors to comprehend and respond to the rapid changes occurring in the manufacture and distribution of investment products. For more information, contact FRC at (866) 532-8009, frcinfo@frcnet.com, or visit www.frcnet.com.
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