Choose the Target Date Series That s Best for Participants. Retirement Target Date Funds 2017 Edition

Transcription

1 Choose the Target Date Series That s Best for Participants. Retirement Target Date Funds 2017 Edition

2 Target Date Funds Are a Key Investment Option Choose wisely. Selecting a target date fund series for a defined contribution plan is one of the most important investment decisions a plan sponsor will make. This is true for a number of reasons for both private- and public-sector plans. Target date funds: Offer plan sponsors an enormous opportunity to help their plan participants improve their long-term investment outcomes. Are one of four investment types that meet the Department of Labor (DOL) requirements, when applicable, for a qualified default investment alternative (QDIA), which can reduce a plan sponsor s investment-related fiduciary liability. Receive nearly 85% of all new private-sector plan contributions. 85% 48% of 401(k) plans offered target date funds 1 of 401(k) participants held target date funds 2 85% of new retirement plan contributions are projected to flow into target date funds by the end of $ 2.1trillion in assets are projected to be held in target date funds by the end of As of year-end Callan Associates, 2016 Defined Contribution Trends 2 As of year-end Investment Company Institute, 2016 Investment Company Fact Book 3 Cerulli Associates, 2016 U.S. Defined Contribution Distribution 4 Strategic Insights, 2015 DC Market Sizing Although American Funds target date funds are managed for investors on a projected retirement date time frame, the funds allocation approach does not guarantee that investors retirement goals will be met. American Funds investment professionals manage each target date fund s portfolio, moving it from a more growth-oriented approach to a more income-oriented focus as the fund gets closer to its target date. The target date is the year in which an investor is assumed to retire and begin taking withdrawals. 2 Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

3 Put Participants First When Evaluating Target Date Funds Establish a process for comparing and selecting TDFs. U.S. Department of Labor Target Date Retirement Funds Tips for ERISA Plan Fiduciaries, February 2013 Align Target Date Fund Selection With DOL Guidelines In response to the growing popularity of target date funds, the DOL issued guidelines stating that plan sponsors should establish an objective process to evaluate, compare and select a target date fund series. The DOL urged plan sponsors to engage in a careful target date fund evaluation process to meet their own fiduciary obligations and help participants move closer to attaining their retirement goals. Based on this guidance, American Funds believes that a plan sponsor s evaluation process should encompass the following five considerations: Participant Needs The key participant investment need is to manage both longevity risk and market risk, which requires target date funds to strike the appropriate balance between appreciation and stability at each point in a participant s career. Glide Path Construction Each target date series glide path should evolve over time within major asset classes and provide thorough diversification through traditional asset classes and subclasses. Value Versus Cost Sponsors should consider the value of a target date series relative to its costs by comparing expenses with returns over long periods of time. Quality of Underlying Funds A target date series is only as good as its underlying funds. Plan sponsors should evaluate each target date fund s underlying funds as well. Consistency and Repeatability Sponsors should evaluate the target date series to ensure that the investment manager s approach is consistent across all target date funds and that series investment results were repeated over meaningful time periods. Compare Target Date Funds Visit americanfunds.com to access our analytical tools: Target Date ProView, SM a powerful online tool that quickly creates a DOL-aligned document comparing up to four funds.* Target Date Fund Peer Analysis, which compares several metrics of many leading target date fund families. Call your American Funds sales professional for help evaluating any target date series, or for more information about the American Funds Target Date Retirement Series. *Use of Target Date ProView may be subject to approval by your home office. 3

4 1 Participant Needs Why This Matters A common objective should be to help retirement plan participants strive for better investment outcomes over the course of several decades and longer. Early in their careers during the accumulation period, participants need investments that provide growth potential. Over time, stability becomes more of a priority, but the role of appreciation providing for future needs never disappears. Sponsors should understand participant needs at various investment stages, so they can select a target date series that helps meet vital participant accumulation, transition and distribution goals. Generally, retirement plan participants face two primary risks: Longevity risk (the threat of outliving their savings) Market risk (the volatility of returns) To address longevity risk, target date series typically seek capital appreciation from stocks and other relatively volatile assets. To address market risk, they typically seek stability from fixed income and other lower volatility assets. The primary challenge for a target date series, then, is to achieve an appropriate balance of appreciation and stability at each point in participants careers. Two factors influence this balance of appreciation and stability: participant age and plan-specific characteristics. For these reasons, choosing the right target date series depends on the relevant plan demographics, which can include: Employee age, salary, tenure and account balance Contribution rates Investment Goals Change as Participants Near Retirement Typical participant retirement age Participation in the plan post-retirement Eligibility requirements for the defined benefit plan, if available to participants Fiduciaries who understand plan demographics and participant needs will be better informed, more effective and better able to demonstrate to regulators that they are focused on fulfilling their fiduciary duties. Grow Investment stages Balance Sustain Asset mix (% of equities) 45 (Years) 0 Retirement Accumulation Transition Distribution 30 4

5 A Dividend Focus Helps Build and Preserve Wealth One simple fact poses an additional challege for participants: Markets and investments don t always appreciate. And since retirement plan accounts serve as a primary accumulation vehicle, it s important to consider how each target date series reacts to market volatility. A main component of the American Funds strategy, which has historically helped to reduce losses and volatility, can be found in an emphasis on equities that pay dividends. The chart below illustrates that companies that pay dividends have historically outpaced non-dividend-paying companies while experiencing less volatility. Dividends Have Been a Powerful Way to Reduce Volatility and Generate Return Hypothetical initial investments of $100,000 TDFs may have different investment strategies, glide paths and investment-related fees. Because these differences can significantly affect the way a TDF performs, it is important that fiduciaries understand these differences when selecting a TDF as an investment option for their plan. U.S. Department of Labor Target Date Retirement Funds Tips for ERISA Plan Fiduciaries, February 2013 Total returns indexed to 100 (logarithmic scale) $10,000 1,000 Dividend growers $1,303,723 Dividend payers $1,082,872 Global universe $844,400 Non-dividend payers $290, Data from 12/31/89 12/31/16 Annualized Returns (%) Annualized Standard Deviation (%) Dividend growers Dividend payers Global universe Non-dividend payers Year: Results are based on the weighted average of total returns in USD (with gross dividends reinvested) of a global universe of companies for the period December 31, 1989, to December 31, The global universe consisted of the 1,000 largest companies in the MSCI IMI indexes for North America (50% weight), Europe (25%), Japan (10%) and the 500 largest companies for emerging markets (10%) and Pacific ex Japan (5%) starting in January 2005 (company-level data were not available prior to 2005). For the period December 1989 to December 2004, the global universe consisted of the 1,000 largest companies in the S&P Global BMI indexes for North America, Europe and Japan and the 500 largest companies for emerging markets and Pacific ex Japan (with the same geographic weighting). The universe constituents were updated and rebalanced quarterly. A company was classified as a dividend payer if it paid a dividend during the previous 12 months. A company was classified as a dividend grower (a subset of payers) if its trailing 12-month dividend per share increased relative to one year earlier. Volatility reflects annualized standard deviation of monthly total returns. Past results are not predictive of results in future periods. Sources: FactSet, Compustat, Thomson Reuters Worldscope, MSCI, Capital Group. 5

6 Ideas for Action Conduct an audit to determine what participant data are available already. Develop a process to collect necessary participant data. With help from your TPA or plan administrator, analyze the data to determine the influence it might have on the creation of your glide path. We Strive to Reduce Longevity Risk and Market Risk Our target date funds captured more of the upside and less of the downside than their category average, helping participants to manage longevity and market risk. Five-Year Overall Capture Ratio (%) vs. S&P 500 Results for the Five-Year Period Ended December 31, Select the target date fund series that best suits participants American Funds Target Date Retirement Series, Class R-6 shares 0.7 Morningstar category average Fund: Upside/Downside Capture Upside capture: The percentage of a rising market in which the fund has participated Downside capture: The percentage of a declining market in which the fund has participated Overall capture ratio: Divides upside capture by downside capture. A ratio greater than 1 indicates that the fund s historical upside has exceeded its downside. Overall Capture Ratio = Fund s Upside Capture Fund s Downside Capture American Funds Target Date Retirement Series Upside Capture % Downside Capture % Overall Capture Ratio % Morningstar category average Upside Capture % Downside Capture % Overall Capture Ratio % American Funds 2060 Target Date Retirement Fund launched on March 27, Not included in chart due to insufficient available data. Source: Capital Group, based on data from Morningstar. The list of each underlying fund s Morningstar category can be found on page 16. Upside/downside capture ratio reflects the annualized product of fund returns versus index returns for all months in which the index had a positive return (upside capture) or negative return (downside capture). 6

7 2 Glide Path Construction Why This Matters The glide path is the heart of any target date series. Each series underlying funds and asset allocation approach are important in determining how successful participants are at managing longevity and market risk. Different providers target date series vary in their equity exposure, even among funds designed for the same retirement year. Our Glide Path Has Distinguishing Characteristics The funds in the American Funds target date series: Are managed for 30 years past retirement so that participants can remain invested in a single fund over their entire life span. Have meaningful equity exposure approaching and throughout retirement to help participants manage the risk of outliving their savings. Emphasize dividends to provide more equity exposure without increasing volatility what we refer to as our glide path within a glide path. American Funds Target Date Retirement Series Glide Path Many target date series employ a static equity approach, which fails to distinguish between growth- and income-oriented equities. Glide path objective Mix of capital appreciation and income generation Assets U.S. and international equity Glide path objective Capital appreciation Assets U.S. and international equity 100% American Funds Target Date Glide Path Accumulation Transition Distribution Growth-and-income funds Growth funds Years before retirement Fixed income funds Equity-income/Balanced funds Years after retirement Retirement Glide path objective Primarily income generation, but also capital appreciation and preservation Assets U.S. and international equity and fixed income funds Glide path objective Capital preservation and income generation Assets U.S. and international credit, government and securitized bonds The allocations shown reflect the funds target allocations for January 1, The funds investment adviser anticipates that the funds will invest their assets within a range that deviates no more than 10% above or below the allocations set forth above. Allocation percentages and underlying funds are subject to the Portfolio Oversight Committee s discretion and will evolve over time. Underlying funds may be added or removed during the year. For quarterly updates of fund allocations, visit americanfundsretirement.com. Our glide path within a glide path equity approach attempts to solve for both market risk and longevity risk. Income Growth By contrast, a typical static equity approach reduces all equity exposure over time, which fails to address longevity risk. Income Growth 7

8 For quarterly updates of underlying fund allocations and for information on other funds in the series, visit americanfunds.com. A Look Inside a Glide Path For a better understanding of how a target date fund can serve as a complete diversified portfolio, let s take a look inside American Funds 2030 Target Date Retirement Fund. Investment Objectives of Our 2030 Fund Depending on the proximity to its target date, the fund will seek to achieve the following objectives to varying degrees: growth, income and conservation of capital. The fund will increasingly emphasize income and conservation of capital by investing a greater portion of its assets in bond, equity-income and balanced funds as it approaches and passes its target date, which is the year in which an investor is assumed to retire and begin taking withdrawals. Once the fund reaches its target date, American Funds investment professionals continue to manage it for 30 years. Inside American Funds 2030 Target Date Retirement Fund Asset Mix of the 2030 Fund U.S. equity 48.6% Non-U.S. equity 23.7 U.S. bonds 18.3 Non-U.S. bonds 3.2 Cash & equivalents 6.2 Cash and equivalents includes short-term securities, accrued income and other assets less liabilities. Began Operations: February 1, 2007 Total Series Assets: $53.7 billion (Figure shown is for the month ending December 31, Assets are for all funds and share/unit classes in the series.) % 20.0% 35.0% 28.9% Fixed Income Funds U.S. Government Securities Fund 7.7% American Funds Inflation Linked Bond Fund 2.8 American Funds Mortgage Fund 2.0 Capital World Bond Fund 2.0 Intermediate Bond Fund of America 1.6 Equity-Income/Balanced Funds American Balanced Fund 6.0 American Funds Global Balanced Fund 6.0 Capital Income Builder 4.0 The Income Fund of America 4.0 Growth-and-Income Funds Washington Mutual Investors Fund 8.0 The Investment Company of America 7.0 American Mutual Fund 6.0 Fundamental Investors 6.0 Capital World Growth and Income Fund 5.0 International Growth and Income Fund 3.0 Growth Funds New Perspective Fund 6.2 AMCAP Fund 5.2 The Growth Fund of America 5.1 SMALLCAP World Fund 4.8 EuroPacific Growth Fund 3.6 New World Fund 2.2 The New Economy Fund 1.8 This fund is designed for investors who plan to retire in, or close to, the year 2030 and begin withdrawing their money. Although the target date fund is managed for investors on a projected retirement date time frame, the fund s allocation approach does not guarantee that investors retirement goals will be met. The allocations shown reflect the funds actual allocations for December 31, Totals may not reconcile due to rounding. Allocation percentages and underlying funds are subject to the Portfolio Oversight Committee s discretion and will evolve over time. Underlying funds may be added or removed during the year. For quarterly updates of fund allocations, visit americanfundsretirement.com. 8

9 Transitions Should Be Gradual for a Target Date Fund A glance at our series glide path reveals smooth transitions among diversified asset classes. Asset Class Exposure Details (as of December 31, 2016) Ideas for Action Search for a series with competitively priced underlying funds in traditional asset classes that feature significant diversification without sacrificing liquidity. Percentage of fund allocation Cash & equivalents Non-U.S. fixed income Inflation linked Seek competitively priced funds that can provide growth opportunities beyond benchmarks. Look for a series that takes an evolving approach to allocations within major asset classes and subclasses to help reduce volatility U.S. fixed income High yield REITs Non-U.S. developed equity U.S. equity Emerging markets equity Retirement Accumulation Transition Distribution Equity exposure provides a mix of capital appreciation and income generation. Fixed income exposure provides for diversification of equities and some downside protection. Equity gradually shifts to higher yielding funds with a history of lower volatility. Fixed income exposure seeks a balance of diversification, income and return. Equity exposure primarily emphasizes income generation but also capital appreciation and preservation. Fixed income exposure emphasizes shorter maturity, higher quality funds geared toward greater capital preservation. The glide path s underlying funds, as well as the fund allocation percentages, are subject to the Portfolio Oversight Committee s discretion and will evolve over time. Underlying funds may be added or removed during the year. Portfolio managers of certain underlying funds have the discretion to invest among multiple asset classes, such as stocks and bonds or U.S. and non-u.s. equities; therefore, the asset-class mix of the target date series will change over time, depending on managers future investment decisions. The cash & equivalents category includes convertible, preferred and warrant securities. Source: Capital Group 9

10 3 Value Versus Cost Why This Matters Plan sponsors have a fiduciary responsibility to ensure that their participants are not overpaying for the investments in the plan. There is a tremendous range in fees between both target date funds and share classes. When considering any fund series, sponsors should understand where it falls on the competitive fee spectrum. Fees alone don t tell the whole story, however. To determine value, sponsors should consider a series lifetime returns relative to its fees. High Value and Low Cost Are Crucial to Positive Investor Outcomes Low costs can help plan sponsors demonstrate that they have participants best interests in mind, but they should not be achieved at the expense of value. We offer a range of share classes designed to meet the needs of retirement plan sponsors and participants. The different share classes incorporate varying levels of advisor compensation and third-party service provider payments. Because Class R-6 shares do not include any recordkeeping payments, expenses are lower and results are higher. Other share classes that include recordkeeping costs have higher expenses and lower results than Class R-6. American Funds Target Date Retirement Series Class R-6 Net Expense Ratios Versus Morningstar Peer Group When measured against competitors within similar sales channels, funds in this series represent some of the best bargains available. That s helped by underlying funds that are among the cheapest brokersold offerings. Also good news: A 0.10% management fee that had previously been waived has permanently been eliminated. Morningstar Target-Date Fund Series Report, December 31, American Funds Target Date Retirement Series Funds (Class R-6) Peer Group Average* Source: Morningstar. The Morningstar average expense ratios are based on fund statistics as of December 31, American Funds Target Date Retirement Series net expense ratios are as of the most recent prospectus dated January 1, The expense ratio is one aspect of plan fees and expenses. * The peer group average was calculated based on target date funds in the following Morningstar Fee Level-Distribution groups to achieve statistical relevance: Retirement, Large; No Load; and Institutional. The Morningstar Retirement, Large fee level group is composed of target date funds classified by Morningstar as Retirement share class type with a 12b-1 fee of 0.0%. 10

11 The Series Has Delivered Strong Relative Results for Participants The chart below shows how the funds in the series have fared based on their returns, net of costs, since their launch. Percentile Rankings of American Funds Target Date Retirement Series Class R-6 Shares 1st quartile 2nd quartile 3rd quartile 4th quartile American Funds Target Date Fund Morningstar Target Date Category year rank Five-year rank Three-year rank One-year rank Percentile 1% 1% 1% 1% 1% 1% 1% 3% 5% Absolute 1 of 51 1 of 57 1 of of 61 1 of of 61 2 of of 50 4 of 66 Percentile 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% Absolute 1 of 86 1 of of of of of of of of 71 1 of 69 Percentile 1% 1% 1% 1% 1% 1% 1% 1% 2% 1% Absolute 1 of of of of of of of of of 96 1 of 87 Percentile 30% 28% 28% 23% 19% 15% 20% 43% 45% 40% 29% Absolute 41 of of of of of of of of of of of 112 Results as of March 31, Percentile rankings for one-, three- and five-year periods calculated by Morningstar. Ten-year rankings calculated by Capital Group, using data obtained from Morningstar. Rankings are based on the funds average annual total returns (Class R-6 shares at net asset value) within the applicable Morningstar categories. The Morningstar rankings do not reflect the effects of sales charges, account fees or taxes. Past results are not predictive of results in future periods. Investment results assume all distributions are reinvested and reflect applicable fees and expenses. The Morningstar category average includes all share classes for the funds in the category. While American Funds R-6 shares do not include fees for advisor compensation and third-party service provider payments, the share classes represented in the Morningstar category have varying fee structures and can include these and other fees and charges resulting in higher expenses and lower results than American Funds R-6 shares. Investment results assume all distributions are reinvested and reflect applicable fees and expenses. When applicable, investment results reflect expense reimbursements, without which results would have been lower. Please see americanfunds.com for more information. The investment adviser is currently reimbursing a portion of other expenses for each share class of American Funds 2060 Target Date Retirement Fund. The reimbursement will be in effect through at least January 1, The adviser may elect at its discretion to extend, modify or terminate the reimbursement at that time. Investment results and net expense ratios for the 2060 Fund reflect the reimbursement, without which the results would have been lower and the expenses would have been higher. 11

12 Ideas for Action Compare each target date series lifetime returns, volatility and fees over the long term with those of other target date series and share classes. Use these findings to determine if the series has delivered value. The American Funds Series Has Generated Superior Results While Effectively Managing Volatility This table shows how well our target date funds have fared against their Morningstar peer group averages. Figures shown are past results and are not predictive of future results. Current and future results may be lower or higher than those shown here. Share prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. For current information and month-end results, see americanfundsretirement.com. For the fourth year in a row, American Funds Target Date Retirement Series has taken home multiple Thomson Reuters Lipper Awards. In a near sweep of the target date fund category, 10 of the firm s target date funds (R-6) were honored for their three- and five-year results. Based on three- and five-year consistent returns as defined by superior consistency and risk-adjusted return when compared to the Lipper Mixed- Asset Target Date Fund peer groups. The 2017 Thomson Reuters Lipper Fund Awards were awarded on March 23, 2017 and based on the periods ended November 30, From Thomson Reuters Lipper Awards, 2017 Thomson Reuters. All rights reserved. Used by permission and protected by the Copyright Laws of the United States. The printing, copying, redistribution, or retransmission of this Content without express written permission is prohibited. 10-year Fund Volatility and Returns Compared to Morningstar Averages (Class R-6 shares) (April 1, 2007 March 31, 2017) Standard Average Annual Deviation (%) Lifetime Total Return (%) American Funds 2050 Target Date Retirement Fund Morningstar Average Fund American Funds 2045 Target Date Retirement Fund Morningstar Average Fund American Funds 2040 Target Date Retirement Fund Morningstar Average Fund American Funds 2035 Target Date Retirement Fund Morningstar Average Fund American Funds 2030 Target Date Retirement Fund Morningstar Average Fund American Funds 2025 Target Date Retirement Fund Morningstar Average Fund American Funds 2020 Target Date Retirement Fund Morningstar Average Fund American Funds 2015 Target Date Retirement Fund Morningstar Average Fund American Funds 2010 Target Date Retirement Fund Morningstar Average Fund Standard & Poor s 500 Composite Index MSCI All Country World Index (ACWI) ex USA Bloomberg Barclays U.S. Aggregate Index Source: Morningstar Volatility is measured by annualized standard deviation (based on monthly returns) over the funds lifetime, calculated at net asset value by Morningstar. Investment results assume all distributions are reinvested and reflect applicable fees and expenses. When applicable, investment results reflect expense reimbursements, without which results would have been lower. The investment adviser is currently reimbursing a portion of other expenses for each share class of American Funds 2060 Target Date Retirement Fund. The reimbursement will be in effect through at least January 1, 2018, unless modified or terminated by the investment adviser. The S&P 500 is a measure of large-company U.S. stocks. MSCI ACWI ex USA measures stock markets in more than 40 developed and developing countries except for the U.S. The Bloomberg Barclays U.S. Aggregate Index is a measure of the broad fixed income market. Indexes are unmanaged and, therefore, have no expenses. There have been periods when the funds have lagged the indexes. Investors cannot invest directly in an index. 12

13 4 Quality of Underlying Funds Why This Matters The funds that make up a target date series may be as important to its returns and risks as the glide path, so evaluating a target date fund requires an analysis of its underlying funds. When evaluating a target date series underlying funds, consider: Persistency over long periods Strategies to mitigate risk Fund consistency Tenure of fund managers Diversification Our Underlying Funds Have Provided an Exceptional Foundation A target date fund is only as good as its underlying funds. Many of the underlying American Funds target date funds have long and distinguished track records in fact, our underlying funds have outpaced their respective Lipper peer indexes in 91% of rolling 10-year periods. 1 91% of the time our underlying funds outpaced peers 9% of the time they didn t American Funds Has More Funds on Morningstar s Fantastic 45 Than Any Other Target Date Series For the fifth year in a row, more than half of the underlying equity-focused funds in American Funds Target Date Retirement Series evaluated by Morningstar made their Fantastic list. Eleven American Funds were named to the list the most of any target date series in the industry. 2 Eleven Underlying Funds Made Morningstar s Fantastic 45 3 New World Fund EuroPacific Growth Fund AMCAP Fund The Growth Fund of America New Perspective Fund Capital World Growth and Income Fund The Investment Company of America Washington Mutual Investors Fund American Balanced Fund American Funds Global Balanced Fund Capital Income Builder American Funds Target Date Retirement Series Funds 3 Growth Investments Growth and Income Investments Equity-Income/Balanced Investments 1 Based on Class R-6 share results for rolling periods through December 31, Periods covered are the shorter of the fund s lifetime or since the comparable Lipper inception date. 2 Source: Morningstar, Fund Spy article, September 13, Morningstar evaluated funds based on eight criteria that included manager tenure, fund results and expense ratios, as well as Morningstar risk, parent and analyst ratings. 3 The target date funds holdings are as of December 31, Not all 11 funds listed in the Fantastic 45 are in each target date fund. Not all of the underlying funds in the target date series are shown here. Underlying funds may change over time. 13

14 Our Series Stacks Up Well Against Its Peers The tables below show how our target date funds rank within their Morningstar categories over various periods of time. Morningstar Rankings as of March 31, 2017 (Class R-6) American Funds Target Date Retirement Series Morningstar Category Rank 1 Year 3 Years 5 Years 10 Years Funds in Percentile Rank Funds in Percentile Rank Funds in Percentile Rank Funds in Percentile Category Rank Category Rank Category Rank Category Rank 2060 Morningstar Target Date Funds Morningstar Target Date Funds Morningstar Target Date Funds Morningstar Target Date Funds Morningstar Target Date Funds Morningstar Target Date Funds Morningstar Target Date Funds Morningstar Target Date Funds Morningstar Target Date Funds Morningstar Target Date Funds Morningstar Target Date Percentile rankings are calculated by Morningstar, except when the share class inception date falls within the ranking period, in which case they are calculated by Capital Group using data obtained from Morningstar. Rankings of Underlying Funds as of March 31, 2017 (Class R-6) 1 Year 5 Years 10 Years Rank Number of Rank Number of Rank Number of Fund Name Morningstar Category Funds Funds Funds AMCAP Fund Large Growth EuroPacific Growth Fund Foreign Large Growth The Growth Fund of America Large Growth The New Economy Fund Large Growth New Perspective Fund World Stock New World Fund Diversified Emerging Mkts SMALLCAP World Fund World Stock American Mutual Fund Large Value Capital World Growth and Income Fund World Stock Fundamental Investors Large Blend International Growth and Income Fund Foreign Large Blend The Investment Company of America Large Blend Washington Mutual Investors Fund Large Value Capital Income Builder World Allocation The Income Fund of America Allocation--70% to 85% Equity American Balanced Fund Allocation--50% to 70% Equity American Funds Global Balanced Fund World Allocation American High-Income Trust High Yield Bond The Bond Fund of America Intermediate-Term Bond Capital World Bond Fund World Bond American Funds Inflation Linked Bond Fund Inflation-Protected Bond Intermediate Bond Fund of America Short-Term Bond American Funds Mortgage Fund Intermediate Government Short-Term Bond Fund of America Short-Term Bond U.S. Government Securities Fund Intermediate Government Percentile rankings are calculated by Morningstar, except when the share class inception date falls within the ranking period, in which case they are calculated by Capital Group using data obtained from Morningstar. Rankings are based on the funds average annual total returns within the applicable Morningstar categories. The Morningstar rankings do not reflect the effects of sales charges, account fees or taxes. Past results are not predictive of future results. When applicable, investment results reflect fee waivers and/or expense reimbursements, without which results would have been lower. 14

15 Equity-Focused American Funds Have a History of Outpacing Indexes Since our founding, American Funds has taken a research-driven, company-by-company approach to building objective-based portfolios. Historical analysis shows that our equity-focused funds have outpaced indexes and similar funds of other investment managers, in aggregate, over rolling periods since Our success rate improved over longer periods that s especially important for retirement plan participants. Figures shown are past results for Class A shares with all distributions reinvested and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. Results are at net asset value, and if a sales charge had been deducted, results would have been lower. Ideas for Action Compare target date funds history of producing excess returns over the long term. Examine the consistency of the underlying funds strategies and management. Evaluate underlying funds approaches to diversification and risk management. Success Rate ( ) Percentage of time (rolling periods, monthly basis) our funds have led their indexes equity-focused American Funds and like funds within the same Morningstar categories of other investment managers in aggregate 96% 85% 57% 45% 61% 46% 65% 47% 73% 49% 42% 36% Equity-Focused American Funds in Aggregate Like Funds Within the Same Morningstar Categories of Other Investment Managers in Aggregate 1 year 3 years 5 years 10 years 20 years 30 years 4, ,564 4,429 96,700 4,424 87,856 4,293 63,928 3,475 23,842 2,415 7,939 7, ,688 7, ,912 6, ,425 5, ,696 4,080 56,310 2,522 21,760 u u Outpaced Indexes Total Number of Rolling Periods The 18 American Funds equity-focused funds used in our analysis (and the relevant indexes/index blends with which they were compared) are as follows: AMCAP Fund, The Growth Fund of America, The New Economy Fund, American Mutual Fund, Fundamental Investors, The Investment Company of America and Washington Mutual Investors Fund (Standard & Poor s 500 Index); American Funds Developing World Growth and Income Fund (MSCI Emerging Markets Index); EuroPacific Growth Fund and International Growth and Income Fund (MSCI All Country World ex USA Index); New Perspective Fund, New World Fund and Capital World Growth and Income Fund (MSCI All Country World Index); SMALLCAP World Fund (MSCI All Country World Small Cap Index); Capital Income Builder and American Funds Global Balanced Fund (60% MSCI All Country World and 40% Bloomberg Barclays Global Aggregate indexes); and The Income Fund of America and American Balanced Fund (60% Standard & Poor s 500 and 40% Bloomberg Barclays U.S. Aggregate indexes). Results are calculated at net asset value. If the maximum Class A share sales charge (currently 5.75%) had been deducted, results would have been lower. All relevant indexes listed are funds primary benchmarks, with the exception of Capital Income Builder and The Income Fund of America. The primary benchmark for Capital Income Builder is Standard & Poor s 500 Index; for The Income Fund of America, they are Standard & Poor s 500 and Bloomberg Barclays U.S. Aggregate indexes. Capital Income Builder and Income Fund of America were compared to their Morningstar benchmark index blend described above in order to provide a more relevant comparison based on the funds investment strategies. The market indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index. Source for like funds of other investment managers is Morningstar. For indexes and American Funds, data from published sources were calculated internally. Numbers of periods are based on rolling monthly data for all funds reducing entry- and exit-point bias, and better reflecting the range of entry points experienced by investors. It should be noted, however, that overlapping time frames impose limitations on statistical inference. Past results are not predictive of results in future periods. 15

16 5 Consistency and Repeatability Why This Matters Plan sponsors should determine if the prospective target date series pattern of results is likely to be consistent and repeatable. To conclude that a particular target date series meets these two key criteria, sponsors should consider: Stability of the fund and its glide path construction Consistency of the series results over rolling periods Downmarket protection during severe market declines Experience, tenure and retention rate of series oversight managers Investment management structure Organizational stability According to Morningstar, Our Managers Have Formidable Experience At American Funds, we have what we believe to be a compelling advantage: We draw from a deep roster of talented investment professionals, each with different knowledge and experience to bring to bear on our target date funds. The funds in the series are monitored by our Portfolio Oversight Committee, a team of veteran investment professionals Portfolio Oversight Committee About the Committee The Portfolio Oversight Committee members, on average, have 29 years of investment experience. Each portfolio manager: Meets regularly with other members to evaluate fund results and the allocations of the underlying American Funds. Adjusts fund allocations as appropriate. Has at least $100,000 of his or her own money invested in the series, with four investing more than $1 million. with diverse backgrounds. The team meets regularly to review the results of the target date funds. While the committee will not react based on investment fads or short-term trends, it can make changes in the allocations of the underlying funds when deemed in the best interest of the long-term needs of fund investors. Portfolio Managers Alan Berro Equity 31 years of experience Los Angeles Joanna Jonsson Equity 28 years of experience Los Angeles James Lovelace Equity 35 years of experience Los Angeles Wesley Phoa Fixed income 23 years of experience Los Angeles Managers who invest alongside shareholders generally have better riskadjusted records than those with limited or no investment Target-Date Fund Landscape Morningstar, 2015 data John Smet Fixed income 35 years of experience Los Angeles Andrew Suzman Equity 23 years of experience New York Bradley Vogt Equity 29 years of experience Washington, D.C. The data for the investment professionals shown here are as of January 1, Investment professional responsibilities may have changed since that date. 16

17 Guided by Experienced Investment Professionals A recent Morningstar study found that the average tenure of the portfolio managers of our Series underlying funds is among the highest in the industry. The figures shown below highlight the strength of our portfolio managers experience. Average Tenure of Portfolio Managers of Underlying Funds in Target Date Series* Target date fund industry average 5.8 years Ideas for Action Check the stability of the funds approach, including its glide path. Review series results, considering consistency and downmarket protection. Evaluate series management personnel and structure American Funds Target Date Retirement Series average 9.5 years Strength in Numbers 100% 68% 31% of our portfolio managers have 10+ years of investment experience. of our fixed income portfolio managers experienced the difficult 1994 bond market. of our portfolio managers experienced the October 1987 crash. American Funds has a reputation for having some of the investment industry s most-tenured managers, and its target-date series includes nearly all of the firm s funds. It makes sense that the average tenure of its underlying managers ranks among the target-date industry s highest at more than nine years. Morningstar 2015 Target-Date Fund Landscape * Source: Morningstar, Inc Target-Date Fund Landscape, April 7, Based on all American Funds portfolio managers industry experience as shown in the fund prospectuses as of January 1,

18 Results Figures shown for underlying funds are past results for shares at net asset value and are not predictive of future results. Current and future results may be lower or higher than those shown here. Share prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. Class R-6 shares do not require an upfront or deferred sales charge. For current information and month-end results, visit americanfunds.com. Average Annual Total Returns (%) as of March 31, 2017 (Class R-6) Inception Expense Ratios* (%) Fund name Date Lifetime 10 Years 5 Years 3 Years 1 Year Net Gross Growth Funds AMCAP Fund 5/1/ % 8.37% 13.23% 8.55% 15.32% 0.67 EuroPacific Growth Fund 4/16/ The Growth Fund of America 12/1/ The New Economy Fund 12/1/ New Perspective Fund 3/13/ New World Fund 6/17/ SMALLCAP World Fund 4/30/ Growth-and-Income Funds American Mutual Fund 2/21/ Capital World Growth and Income Fund 3/26/ Fundamental Investors 8/1/ International Growth and Income Fund 10/1/ The Investment Company of America 1/1/ Washington Mutual Investors Fund SM 7/31/ Equity-Income Funds Capital Income Builder 7/30/ The Income Fund of America 12/1/ Balanced Funds American Balanced Fund 7/26/ American Funds Global Balanced Fund 2/1/ Bond Funds American Funds Inflation Linked Bond Fund 12/14/ American Funds Mortgage Fund 11/1/ American High-Income Trust 2/19/ The Bond Fund of America 5/28/ Capital World Bond Fund 8/4/ Intermediate Bond Fund of America 2/19/ Short-Term Bond Fund of America 10/2/ U.S. Government Securities Fund 10/17/ Target Date Funds American Funds 2060 Target Date Retirement Fund 3/27/ American Funds 2055 Target Date Retirement Fund 2/1/ American Funds 2050 Target Date Retirement Fund 2/1/ American Funds 2045 Target Date Retirement Fund 2/1/ American Funds 2040 Target Date Retirement Fund 2/1/ American Funds 2035 Target Date Retirement Fund 2/1/ American Funds 2030 Target Date Retirement Fund 2/1/ American Funds 2025 Target Date Retirement Fund 2/1/ American Funds 2020 Target Date Retirement Fund 2/1/ American Funds 2015 Target Date Retirement Fund 2/1/ American Funds 2010 Target Date Retirement Fund 2/1/ * Expense ratios are as of each underlying fund s prospectus available at the time of publication and include the weighted average expenses of the underlying American Funds. The expense ratio for American Funds Inflation Linked Bond Fund is estimated. Investment results, when applicable, reflect fee waivers and/or expense reimbursements, without which results would have been lower. Please see americanfunds.com for more information. The investment adviser is currently reimbursing a portion of other expenses for each class of the 2060 fund. The reimbursement will be in effect through at least January 1, The adviser may elect at its discretion to extend, modify or terminate the reimbursement at that time. Investment results and net expense ratios reflect the reimbursement, without which the results would have been lower and the expenses would have been higher. Class R-6 shares were first offered on May 1, Class R-6 share results prior to the date of first sale are hypothetical based on Class A share results without a sales charge, adjusted for typical estimated expenses. Please see each fund s prospectus for more information on specific expenses. 18

19 Figures shown for underlying funds are past results for shares at net asset value and are not predictive of future results. Current and future results may be lower or higher than those shown here. Share prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. For current information and month-end results, visit americanfunds.com. Average Annual Total Returns (%) as of March 31, 2017 (Class R-3) Inception Expense Ratios* (%) Fund name Date Lifetime 10 Years 5 Years 3 Years 1 Year Net Gross Target Date Funds American Funds 2060 Target Date Retirement Fund 3/27/ American Funds 2055 Target Date Retirement Fund 2/1/ American Funds 2050 Target Date Retirement Fund 2/1/ American Funds 2045 Target Date Retirement Fund 2/1/ American Funds 2040 Target Date Retirement Fund 2/1/ American Funds 2035 Target Date Retirement Fund 2/1/ American Funds 2030 Target Date Retirement Fund 2/1/ American Funds 2025 Target Date Retirement Fund 2/1/ American Funds 2020 Target Date Retirement Fund 2/1/ American Funds 2015 Target Date Retirement Fund 2/1/ American Funds 2010 Target Date Retirement Fund 2/1/ Morningstar Rankings as of March 31, 2017 (Class R-3) American Funds Target Date Retirement Series Morningstar Category Rank 1 Year 3 Years 5 Years 10 Years Funds in Percentile Rank Funds in Percentile Rank Funds in Percentile Rank Funds in Percentile Category Rank Category Rank Category Rank Category Rank 2060 Morningstar Target Date Funds Morningstar Target Date Funds Morningstar Target Date Funds Morningstar Target Date Funds Morningstar Target Date Funds Morningstar Target Date Funds Morningstar Target Date Funds Morningstar Target Date Funds Morningstar Target Date Funds Morningstar Target Date Funds Morningstar Target Date Percentile rankings are calculated by Morningstar, except when the share class inception date falls within the ranking period, in which case they are calculated by Capital Group using data obtained from Morningstar. Rankings are based on the funds average annual total returns within the applicable Morningstar categories. The Morningstar rankings do not reflect the effects of sales charges, account fees or taxes. Past results are not predictive of future results. When applicable, investment results reflect fee waivers and/or expense reimbursements, without which results would have been lower. * Expense ratios are as of each underlying fund s prospectus available at the time of publication and include the weighted average expenses of the underlying American Funds. Investment results, when applicable, reflect fee waivers and/or expense reimbursements, without which results would have been lower. Please see americanfunds.com for more information. The investment adviser is currently reimbursing a portion of other expenses for each class of the 2060 fund. The reimbursement will be in effect through at least January 1, The adviser may elect at its discretion to extend, modify or terminate the reimbursement at that time. Investment results and net expense ratios reflect the reimbursement, without which the results would have been lower and the expenses would have been higher. Please see each fund s prospectus for more information on specific expenses. 19