Improve your employees retirement readiness by mapping to target date funds.

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1 DC Insights The Value of Mapping to Target Date Funds Improve your employees retirement readiness by mapping to target date funds. 1

2 Participant benefits Turn a Fresh Start for Your Plan Into a Head Start for Your Employees Converting to a new recordkeeper can represent a fresh start for your company retirement plan. Mapping or moving the plan s assets to target date funds may be one of the best decisions you can make to help your employees as they plan for a successful retirement. The Problem: Participants Need Help Investing Many don t have the time or knowledge to invest wisely. Choosing a mix of investments can be overwhelming. Left to their own devices, they often make investment selections that aren t aligned with their goals. A Solution: Map to Target Date Funds A fund represents a fully diversified portfolio. It s easy to assign participants to a particular fund in the series based on each investor s age. Participants who invest in target date funds feel more confident about pursuing their retirement goals and tend to contribute more to the plan. 1 1 PlanAdviser.com, 4/16/2014. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. 2

3 More than $500 billion are invested in target date funds today. Morningstar, Target-Date Series Research Paper, 2013 Target Date Funds May Account for Nearly Half of All Defined Contribution Assets by Target date funds Target date funds may account for more than 63% of 401(k) contributions by the year Cerulli Associates, 2014 Target date fund assets are expected to reach $2 trillion by the year U.S. News & World Report, 6/21/12 Other funds 2 Source: Investment consultant Casey Quirk. 3

4 Participant benefits Target Date Funds Can Help Your Employees Not long ago retirement plans typically mapped to a money market fund during conversion. This strategy didn t serve participants well, as money market funds barely kept pace with inflation and offered little or no growth potential. By mapping to target date funds, you may be putting your employees on track to meet their retirement goals. One Choice, Many Benefits Diversification: Target date funds handle the task of diversification for the investor, offering an ageappropriate mix of different investments in a single portfolio. Overcoming investor inertia: Target date funds automatically adjust their asset allocation from more growthoriented to more income-oriented as retirement approaches. automatic rebalancing: Over time, asset allocations can shift as they adjust to market changes. Portfolios chosen by participants can then become too risky or too conservative for their goals. Target date fund managers help investors manage this type of asset allocation risk as they monitor and regulate the underlying holdings. Simplicity: The ease of selecting a target date fund can help those who have been overwhelmed by the prospect of choosing investments and, in some cases, have avoided participating in the plan as a result. Potentially better results: Studies indicate that participants invested in target date funds are more likely to attain better long-term investment results than those who choose their own investments. 4

5 Participants who chose a target date fund as their portolio experienced a median annual return nearly 3% higher than those who didn t, even after fees Financial Engines/Aon Hewitt study How Might This Translate Into Results Over Time? 2.92% higher 7.92% annual growth rate over 30 years $984,143 This chart shows the growth of two hypothetical $100,000 investments over 30 years, independent of expenses. Investment A assumes a 5% annual growth rate, independent of expenses. Investment B assumes an annual growth rate that s 2.92% higher similar to the Financial Engines/Aon Hewitt findings % annual growth rate over 30 years $432,194 $100,000 $100,000 Investment A Investment B Not intended to portray the actual results or growth rates of any investment. Your experience will differ. Past results are not predictive of future results Financial Engines/Aon Hewitt study, Help in Defined Contribution Plans: 2006 Through The study found that investors who sought help in the form of advice from their 401(k) website, enrolled in a professionally managed account or were at least 95% invested in a target date fund experienced a median annual return as much as 2.92% better than those who didn t over the five-year span of the research. All returns reported were net of fees, including fund-specific management and expense fees, and managed account fees, where applicable. 5

6 PLAN SPONSOR CONSIDERATIONS Your Choice of Target Date Funds Is Critical to Your Plan s Success Target date funds are best for QDIAs in retirement plans. Bloomberg Bureau of National Affairs, Managing 401(k) Plans, 2014 One of the most important decisions you ll need to make now is selecting a broad range of investment choices for your participants including the plan s default investment option for those who fail to choose their investments. By choosing a qualified default investment alternative, you can realize fiduciary protection with respect to the assets invested in the QDIA. QDIAs are safe harbor investments identified by the Pension Protection Act of And target date funds are the dominant choice of QDIA among retirement plans. 5 When It Comes to Moving Assets From Your Old Plan Recordkeeper, What Will You Tell Your Employees? We think we got it right. We chose an investment designed to work for you. Move like funds to like funds Takes a lot of time and effort and is rarely an exact science Retains poor asset allocations selected by participants Only offers fiduciary protection if the funds offered by the new recordkeeper have risk-andreward characteristics similar to the existing funds Map to target date funds Eliminates the guesswork of mapping to appropriate funds by offering age-appropriate options for each participant By defaulting participants into a target date QDIA, the plan sponsor is protected from fiduciary liability as long as participants have 30 days advance notice to make an affirmative election to the new plan s investments 4 The Department of Labor has identified target date funds, balanced funds and managed accounts to be appropriate choices for QDIAs. 5 Pensions & Investments, 2/3/14. 6

7 [The American Funds Target Date Retirement Series] remains one of the stronger mutual fund offerings available to investors... Morningstar, Target-Date Fund Series Report, 12/31/12 Ask These Questions When Evaluating Target Date Funds 1 How is the glide path constructed? With the American Funds Target Date Retirement Series, your participants would have meaningful equity exposure in all phases of the glide path to help them address the challenges of market and longevity risk. At the same time, there is an emphasis on dividends that can help generate income and manage volatility. American Funds Target Date Glide Path 100% Planned retirement year Growth-and-income funds Fixed-income funds 2 Who manages the series? The American Funds Target Date Retirement Series is managed by a Portfolio Oversight Committee a group of veteran investment professionals averaging 25 years of industry experience who have managed investments through good markets and tough ones. 3 What underlying funds are used in the series? Here s what Morningstar said about the underlying American Funds in our series: Few, if any, other target-date series have as many highly regarded underlying holdings. 6 4 How much do participants pay for the funds? At American Funds, we understand that high costs can erode assets over the course of three or four decades of saving for retirement, and two or three decades of living in retirement. That s why ours are among the lowest cost of all advisor-sold target date funds Equity-income/balanced funds Growth funds Years before retirement Retirement Years after retirement 5 What are the results of the target date series? Even a small differential in annual returns can mean a big difference over the course of a participant s retirement. The American Funds Target Date Retirement Series has aboveaverage lifetime results with lower volatility. 7 When you decide to map to target date funds, consider the American Funds difference. 6 Morningstar, Target-Date Fund Series Report, 12/31/13. 7 R-3 shares relative to their Morningstar Retirement, Medium peer averages, which are composed of target date funds classified by Morningstar as Retirement share class type with a 12b-1 fee greater than 0% and less than or equal to 0.50%, as of 12/31/13. 7

8 Your employees will thank you. Your conversion to a new plan recordkeeper demonstrates your desire to upgrade the company retirement plan and improve participant outcomes. Mapping to target date funds can help make a big difference. To make the American Funds Target Date Retirement Series your plan s QDIA, contact your plan s financial advisor or call American Funds at (800) , ext. 3. Each of the funds in the American Funds Target Date Retirement Series attempts to balance investors long-term needs for both return and conservation of capital. All funds in the series are subject to the risks of the underlying American Funds. Allocation percentages and the underlying funds for each target date fund are subject to the Portfolio Oversight Committee s discretion and will evolve over time. Investment professionals continue to manage each fund for 30 years after it reaches its target date. The target date is the year in which an investor is assumed to retire and begin taking withdrawals. Although the target date funds are managed for investors on a projected retirement date time frame, the funds allocation strategy does not guarantee that investors retirement goals will be met. Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. Lit. No. RPGEBR P Printed in USA CGD/CG/AFD/9768-S American Funds Distributors, Inc. Printed on recycled paper