Target Risk vs. Target Date Funds in 401(k) Plans: Maybe the answer is both January 14, 2015
Outline What are Target Risk Funds? What are Target Retirement Date (TRD) Funds? Plan Adoption Trends: Target Risk vs. TRD Are Target Risk Funds Obsolete? Conclusions 2
Target Risk Funds Conservative Moderate Growth US Equities Inflation Related Non US Equities Cash US Equities Non US Equities Inflation Related US Equities Non US Equities 3
Target Risk Funds Advantages Professional allocation management Diversification Automatic rebalancing Static allocation appropriate if risk profile remains unchanged Disadvantages No ability to change poor underlying funds (if prepackaged) Requires investor to assess risk profile Static allocation inappropriate if risk profile changes 4
Target Retirement Date (TRD) Funds 100% 80% 60% 40% 20% 0% Target Retirement Date Funds: Sample Glide Path US Equities Non US Equities Cash Inflation Related 5
Target Retirement Date (TRD) Funds Advantages Set it and forget it Professional allocation management Diversification Automatic rebalancing Allocation varies by proximity to retirement age appropriate if risk profile similar to average participant Disadvantages Glide path is based on average participant No ability to change poor underlying funds (if pre packaged) Additional education may be needed Allocation varies by proximity to retirement age inappropriate if risk profile not similar to average participant 6
Adoption Trend of Target Risk vs. TRD Funds Vanguard defined contribution plans 100% 80% 75% 79% 82% 84% 86% 68% Percentage of plans 60% 40% 51% 45% 28% 43% 41% 37% 58% 33% 30% 29% 27% 25% 24% 20% 13% 6% 6% 8% 11% 14% 15% 17% 16% 16% 16% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Target Risk Target-date Both Sources: Vanguard, How America Saves 2014 7
Are Target Risk Funds Obsolete? Pre-2006 2006-2008 2009-2014 New Role for Target Risk? Pre- Mixed Target Risk/Balanced Target Pre Mixed Retirement Options Suite Target Pre Mixed Retirement Options Suite Target Pre Mixed Retirement Options Suite Target Risk Model Portfolios "Core" Menu Non Non Capital Preservation Non Non Capital Preservation Non Non Non Capital Preservation Inflation Related Non Non Non Capital Preservation Inflation Related 8
Conclusions TRD funds likely to remain the default option of choice Pre packaged target risk funds will continue to decline Target Risk model portfolios comprised of plan s core options can still play a valuable role Cost effective choice for participants wanting more customization than TRD funds but uncomfortable with the DIY approach Leverages due diligence efforts for core options Leverages asset allocation expertise of the plan s advisor DIY investors have a guidepost for how they might construct a conservative, moderate or growth oriented portfolio 9
About Sellwood Consulting LLC Sellwood Consulting LLC is an SEC registered investment advisor providing conflictfree investment consulting services to institutional clients and plan sponsors. Our firm is structured to provide industry leading investment advice, the highest levels of client service, and uncompromising ethics. Contact Us Sellwood Consulting LLC 6650 SW Redwood Lane, Suite 370 Portland, Oregon 97224 (503) 596 2880 Main www.sellwoodconsulting.com Kevin Raymond kevinraymond@sellwoodconsulting.com 10