Practice Management Value-Add Programs. TIAA-CREF Asset Management. Silent alarm: Answering investors quiet pleas for help with target-date funds

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1 Practice Management Value-Add Programs TIAA-CREF Asset Management Silent alarm: Answering investors quiet pleas for help with target-date funds

2 Move beyond preconceived notions. A disconnect and missed opportunity The evolving asset allocation offered by target-date funds can be effective for clients who want their investment risk to adjust as they approach retirement. Yet, these dynamic funds are often overlooked or misunderstood by investors and even by some advisors, too. But why? Looking for answers Our 2015 TIAA-CREF Advisor Practice Management Study uncovered startling disconnects between investors and advisors involving client knowledge, gender differences and other matters. The resulting insights could represent an opportunity for investors, plan sponsors and retirement advisors, and show you the benefits of giving target-date funds a more prominent role in workplace retirement programs. The study examined the dynamics that occur between investors and advisors, focusing on the similarities and differences in their perceptions. Investors had to be at least 21 years old, have at least $100,000 in investable assets and currently work with a financial advisor. In total, 1,004 investors were interviewed, 504 of whom were married or living with a significant other and 500 who were single. All 250 advisors who participated in the study had to provide investment advice to individual investors, work on a team that serves retail clients, and manage at least $25 million in assets. Table of contents Move beyond preconceived notions... 1 Just the facts Just the facts... 1 Asset class knowledge... 2 Review/rebalance frequency... 4 Post-retirement misunderstanding... 6 Demystifying fees... 8 Find the right advice for each client Bridge the perception gap Resources and tools Close to two-thirds of American high-net-worth investors are unable to correctly identify the largest funds asset class (equity, fixed income or allocation). When presented with a multiple-choice question, more than 80% choose the wrong asset type or don t know. 1

3 The dots connect to spell out targetdate funds. While target-date funds weren t mentioned by name, our study revealed that many investors are looking for the features found in these investments. These funds are designed for those who prefer to have their investments professionally managed to help prepare for their retirement years. Not surprisingly, target-date funds, which provide diversified portfolios to suit the objectives of investors with different investment time horizons, have increasingly found a place in employer retirement plans. To nudge investors toward options that may be more suitable to their needs, institutions have adopted these funds as the qualified default investment alternative (QDIA) in their fund menus. This strategy, along with auto-enrollment and default-contribution choices, help make it easier and more convenient for investors to adopt a meaningful asset allocation over time which is viewed as the most important factor in successful investing. TIAA-CREF is dedicated to helping investors manage their assets to and through retirement. These enduring commitments are advanced in this inaugural study. 77 % high-net-worth investors of believe that they will continue to need the same level of investment advice in retirement that they received preretirement. 39 % of advisors believe that investors want very little equity exposure in their retirement years. Silent alarm 1

4 Advisors overestimate investors asset class knowledge. Advisors view their clients and plan participants as pretty savvy investors. In fact, 68% of advisors feel their clients knowledge level actually increased in the five years following the 2008/2009 market downturn. Despite advisors confidence in target-date funds, a full 60% of HNW investors say they are unfamiliar with the term target-date funds. However, our study found that advisors might be overestimating investors actual knowledge. When investors were asked to identify a mutual fund s asset class, close to two thirds of American high-net-worth (HNW) investors were unable to correctly classify the fund as an equity, fixed-income or allocation fund even within the context of a multiple-choice question. For a concrete example, when presented with the top Morningstar fixed-income fund, only 14% of investors were able to correctly categorize the fund as being fixed income when presented with multiple answer choices. For more information about this, see the chart on the next page. P Advisor action Online and offline participant communication is critical to helping participants take an active role in securing their financial future. Targetdate funds can be a great tool to ensure the appropriate asset allocation over time. Online: Provide participants with information on asset allocation or sample model portfolios. Consider target-date funds as a simple portfolio choice. Provide online tools, calculators and advice & guidance. Offline: Host worksite advice sessions. These sessions can bolster participant knowledge and create added referrals for your business. 2 Silent alarm

5 We asked... investors When you look at the name of this market-leading fund, is it... Largest Equity Fund Largest Fixed-Income Fund Largest Allocation Fund 78 % 86 % 94 % W Incorrectly answered W Correctly answered The majority surveyed could not correctly classify market-leading mutual funds. Silent alarm 3

6 Investors and participants can t seem to find the right balance. We also wanted to find out how often investors take a peek at performance and rebalance their portfolios. The answer, it turns out, depends greatly on the investor s assets, age and gender. Perhaps not surprisingly, American HNW investors are very involved, with many of them reviewing their investments at least quarterly. We found that younger investors (ages 18-34), too, are very keen to see how their portfolios are doing. In fact, they are the most likely among all age groups to review their investments several times per year. One third of respondents reported that they ve never reviewed their investments, or rebalanced their portfolio without assistance. Interestingly, we found that a fair number of investors simply like to set it and forget it. In fact, one third of respondents reported that they ve never reviewed their investments, and 27% said they review their investments only once per year or less. But what investors do with this information? The actions investors take to address perceived deficiencies or seize perceived opportunities also vary greatly. Few HNW investors rebalance their portfolio on their own and 33% of investors have never rebalanced their portfolio without their advisor. When it comes to gender, men review their investments more frequently than women. In fact, they are nearly twice as likely to review their portfolios several times a year. While you might expect to see variation across demographic groups, it s clear that a more structured approach may benefit investors of any asset level, age or gender. P Advisor action Working with plan sponsors and participants, you can help show the value of investments that require less time and attention. Host preretirement on-site workshops. This also can be a great source of referrals after the participant leaves the plan. Consider promoting the inclusion of investments in the fund menu that provide for continued growth through retirement. To funds, focused on saving until the retirement date, might be too shortsighted for investors. 4 Silent alarm

7 We asked... investors How often do you review or rebalance your portfolio on your own, without a financial advisor? High-net-worth investors Millennials (ages 18-34) Men vs. women 72 % 50 % 15 % 8 % MEN Review at least quarterly Rebalance several times per year WOMEN Rebalance several times per year Silent alarm 5

8 Investors misunderstand the need for growth post-retirement. When we spoke with advisors, we found that 39% of them believe investors and participants want very little equity exposure in their retirement years. This is striking. The fact is that post-retirement, investment portfolios may need to remain focused on growth in order to offset longevity and interest rate risk, and other factors. More than a quarter (26%) of HNW investors over age 65 do not expect to retire, reflecting either lessened optimism, or a desire to work at least part-time through retirement. TIAA-CREF believes that investors need to have approximately 50% equity exposure at retirement, which may provide continued growth, and may help counter the effects of interest rate increases (for more information on this topic, see the Resource section on page 12). Yet, choosing the right amount of equity exposure for retirees can be a challenge. Maintaining the necessary level of equities through retirement, of course, requires some fortitude during turbulent times, and many advisors are doubtful that investors have what it takes. Nearly half of investors suggested they can stick to a long-term plan through a market downturn. Their advisors aren t as confident. P Advisor action Target-date funds offer different ways to help investors work toward the growth they may need to support longer retirements. Consider target-date funds with higher equity exposure at retirement to account for interest rate, inflation and longevity risk. 6 Silent alarm

9 We asked... advisors & investors Do you agree with the statement: Investors tend to have trouble sticking to a long-term plan in retirement? 30 % of advisors Agree that investors have trouble sticking with a plan. 49 % of investors Disagree. They feel confident they can stick with a plan, even during a market downturn. Silent alarm 7

10 Investors need advisors to demystify mutual funds especially fees. Most advisors nearly 9 out of 10 (88%) believe that investors have difficulty evaluating fees. As a result, advisors, plan sponsors and investors must have a frank conversation about this subject. Advisors and investors tend to agree on the need for professional advice. Investors do seek guidance when choosing a mutual fund, 73% of investors say they ask for advice in picking, while 20% say they typically compare prices. Advisors generally agree with this assessment. That is why advisors play an important role in the workplace; helping plan sponsors evaluate their retirement program s menu of funds, reassessing them over time, and shaping participant communications. Advisors appear to be enthusiastic about the potential benefits of target-date funds as an option to increase the effectiveness of employer retirement programs. Assuming a consulting role on retirement plans, 46% of advisors recommend that target-date funds be included in a plan sponsor s fund menu. P Advisor action Providing insight around hard-to-understand subjects such as investment fees illustrates the value you bring and can help build trust between you and your clients. Take the time to educate plan sponsors and participants and help them evaluate fees. Consider choosing funds in the fund menu with low fees and strong performance. 8 Silent alarm

11 We asked... investors When picking a mutual fund do you typically... Ask for advice 73 % Investors rely on the experts. Compare prices 20 % Other 8 % Silent alarm 9

12 Interestingly, Millennial and Generation X investors are twice as likely as older investors to think they ll need even more advice after retirement. Find the right advice for each client. While there are certain differences between how men and women approach investing, such as those mentioned earlier, advisors perceptions may not match reality. According to advisors, men typically are more likely to go for the gold with their investing behavior, and most of them try to beat the market and hire advisors who are experts in producing higher-than-average returns. However, only a small portion of advisors think the same about female investors But when investors are asked how well the statement I am less concerned with outperforming the market describes them, men and women are in total agreement with 71% of each gender saying that it describes them completely/somewhat. There are also a surprising range of attitudes in high-net-worth investors expectations for the timing of their retirement. Young HNW investors tend to be more optimistic with a quarter of year olds believing they will retire before age 60. By contrast, slightly more than a quarter of HNW investors over the age of 65 do not expect to retire at all, reflecting either a less optimistic view of retirement, or a desire to remain working at least part-time. In general, as older groups of investors are asked about their retirement expectations, they expect to retire at later and later ages. The good news is that advisors and investors tend to agree on the need for professional advice, and that they ll need either the same degree or more professional investment guidance after they retire. 10 Silent alarm

13 Target-date funds may help bridge the investor/advisor perception gap. Investors continue to have a mixed understanding of investments, fees, rebalancing and withdrawal amounts, emphasizing the need for an advisor to play an active role as guide and translator up to and through retirement. Advisors also have an important role to play in shaping workplace plans, designing menus, reassessing them over time, and shaping participant communications. A target-date fund can be a valuable instrument for investors regardless of their expectations and knowledge. These funds, while not a panacea, can help to provide the rebalancing, investment rigor and age-attuned focus that investors need as they pursue their retirement goals. 80% of advisors believe that target-date funds are great for investors who want to take a hands-off approach. Silent alarm 11

14 Resources from TIAA-CREF Asset Management You ll find advisor resources, plan sponsor pass-alongs and more on our website at or call us at , press 2 for any of these helpful items. Advisor resources White paper: Lifecycle funds in a rising interest-rate environment Read about the potential benefits of target-date funds in a rising interest-rate environment. Favorable product design, fixed-income asset class characteristics, and macro factors may mitigate the impact of a rise in rates. Download your tools now. Take just one minute to learn more about opportunities to grow your business with target-date funds. Article: Target date debate in Pensions & Investments (2014) Randall Lowry, TIAA-CREF s Managing Director for Investment Product Management, and portfolio manager John Cunniff take a deep dive into target-date funds and what advisors should consider. Plan sponsor pass-alongs U.S. Department of Labor Guidance: Target-Date Retirement Funds: Tips for ERISA Plan Fiduciaries List of tips issued by the U.S. Department of Labor for sponsors for evaluating appropriate target-date funds for their participants. Worksheet: Twenty-five questions to ask about target-date funds Equip plan sponsors with potential key questions they might consider asking in the next strategy meeting. Participant education Video: Save for retirement in one easy step Share this succinct two-minute video with plan participants on the benefits of target-date funds. White paper: Active vs. index mutual funds: Which approach is right for you? Share a piece that explains the two distinct mutual fund styles of investing active and passive. This short paper can help participants decide which style to choose based on their investment goals and risk tolerance. Explore TIAA-CREF products TIAA-CREF Lifecycle Funds TIAA-CREF Lifecycle Index Funds Retirement income options 12 Silent alarm

15 Learn more today about the opportunities to grow your business with target-date funds. Visit Silent alarm 13

16 C Respondents were given a multiple choice question with the top 20 Morningstar funds. Rankings and total net assets were accurate as of study s commencement in November Source: Survey statistics from the 2015 TIAA-CREF Advisor Practice Management Study For financial advisor use only. Not for use with or distribution to the public. Past performance is not indicative of future results. The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not bank deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value. TIAA-CREF products may be subject to market and other risk factors. See the applicable product literature, or visit tiaa-cref.org for details. The target date is the approximate date when investors plan to start withdrawing their money. The principal value of the funds is not guaranteed at any time, including at the target date. Portfolios are subject to certain risks such as market and investment style risk. Please consider all risks carefully before investing. Target-date mutual funds share the risks associated with the types of securities held by each of the underlying funds in which they invest. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. You should consider the investment objectives, risks, charges and expenses carefully before investing. Please call or log in to tiaa-cref.org for product and fund prospectuses that contain this and other information. Please read the prospectuses carefully before investing. TIAA-CREF Asset Management provides investment advice and portfolio management services to the TIAA-CREF group of companies through the following entities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, and Teachers Insurance and Annuity Association of America (TIAA ). Teachers Advisors, Inc., is a registered investment advisor and wholly owned subsidiary of Teachers Insurance and Annuity Association of America (TIAA). TIAA-CREF is the name commonly used to refer to the companion organization for TIAA and CREF. TIAA-CREF Individual & Institutional Services, LLC, Teachers Personal Investors Services, Inc., and Nuveen Securities, LLC, Members FINRA and SIPC, distribute securities products Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA-CREF), 730 Third Avenue, New York, NY _ A14752 (02/15)