Target Date Funds. Presented By: Andrea Bongiovanni, CFS, Senior Investment Analyst Joseph DeRosa, CIMA, Investment Strategist

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1 Target Date Funds Presented By: Andrea Bongiovanni, CFS, Senior Investment Analyst Joseph DeRosa, CIMA, Investment Strategist

2 Agenda Introduction What are Target Date funds? Why Target Date funds? Target Date fund construction USI Advisors due diligence process Plan Sponsor oversight of Target Date funds Questions 1 Page

3 What Are Target Date Funds? What are Target Date funds? Automatically changes the asset mix over time Targets a retirement date Also called Lifecycle funds Lifecycle v. Lifestyle Lifecycle Funds Automatically adjust Lifestyle Funds Conservative, Moderate, or Aggressive Source: Investopedia 2 Page

4 Why Target Date Funds? Prevent the biggest investor problems Poor diversification Inertia with rebalancing Become more conservative over time Target Date funds promote Diversification across asset classes Avoidance of extreme asset allocations Automatic rebalancing Automatic risk adjustment 3 Page

5 The Target Date Boom Target Date fund total assets have grown 567% since 2005 Total assets in the Target Date category as of October 31, 2012: $45,340,6476, % of defined contribution plans offer Target Date mutual funds as an investment option in the plan 70% of these plans use their Target Date series as the QDIA Average allocation to Target Date funds in Deferred Compensation plans is 12.4% Source: Morningstar; 55 th Annual Survey: PSCA s Annual Survey of Profit Sharing and 401(k) Plans, Plan Sponsor Council of America, May Page

6 Target Date as a Default Option Pension Protection Act of 2006 Established the Qualified Default Investment Alternative (QDIA) Department of Labor identified Target Date Funds as an appropriate QDIA for retirement plans Drivers of the legislation Employers were offering fewer defined benefit plans 401(k) Plans the primary retirement vehicle Participants are responsible for creating their own retirement income Auto-enrollment had become more prevalent 5 Page

7 Balanced Funds and Target Date Funds What are the differences between Balanced (Lifestyle) funds and Target Date (Lifecycle) funds? Balanced funds have Static Allocations Target Date funds have Rolling Allocations 6 Page

8 Understanding the Glidepath What is a glidepath? Predetermined rolling allocation from the inception of a fund until its target Source: ICI Asset mix at any given time is dependent on the number of years until that fund s target date Fund families will have different glidepaths, some with a very steep trajectory, while others will take a more gradual approach 7 Page

9 Understanding the Glidepath When does the glidepath start? What should the starting allocation look like? Should the glidepath be To Retirement or Through Retirement Retirement date is normally assumed to be age 65 Not every fund family has their target date funds stop rolling down at age 65 some go as far as age 95 8 Page

10 Understanding the Glidepath American Century (To Retirement) versus T. Rowe Price (Through Retirement) Glidepath Start Age: 25 Glidepath Start Allocation: 85% Equity / 15% Fixed Income (FI) Retirement Allocation: 45% Equity / 55% FI Glidepath End Age: 65 Glidepath End Allocation: 45% Equity / 55% FI Glidepath Start Age: 35 Glidepath Start Allocation: 90% Equity / 10% FI Retirement Allocation: 56% Equity / 44% FI Glidepath End Age: 95 Glidepath End Allocation: 20% Equity / 80% FI Source: American Century and T. Rowe Price 9 Page

11 Target Date Funds All the Same? Target Date funds differ in more areas than just the glidepath In 2008, returns for Target 2010 funds ranged from -3.61% to % In 2009, those same strategies returned 1.97% to 22.5%, respectively 10 Page

12 What Factors Can Cause These Return Discrepancies? Asset Class Variance Equity Allocation In 2008, the equity weighting for 2010 funds ranged from 25% to 70% of assets. The range is currently between 8% and 51%. Active versus Passive Proprietary versus Non-Proprietary Source: Morningstar Advisor 11 Page

13 USI Advisors Due Diligence Process Source: JPMorgan Northwest Lower Equity at Retirement, Higher Number of Asset Classes Southwest Lower Equity at Retirement, Lower Number of Asset Classes Northeast Higher Equity at Retirement, Higher Number of Asset Classes Southeast Higher Equity at Retirement, Lower Number of Asset Classes 12 Page

14 USI Advisors Due Diligence Process No industry standard has been set for benchmarking yet Current indexes do not account for the varying glidepaths & allocations A few of the tools USI Advisors uses to evaluate these funds objectively are: Fund Specific Benchmarks Category Averages Underlying Holdings Analysis USI Advisors proprietary database In-House Manager Meetings Fund Company Evaluation Tools Morningstar Five P Analysis 13 Page

15 Things to Consider Structure of the investment Glidepath To versus Through Fees Plan & participant characteristics Source: American Benefits Council (the Council) and the Investment Company Institute (ICI): 14 Page

16 Questions? If you have any additional questions, please direct them to your USI Consulting Group representative or by to 15 Page