Welcome back to the conclusion of the story. As discussed, with target date investment options, some glide paths can be “too hot”, some can be “too cold”, but there is no “just right”. Sorry to lead you on.
But, I believe the answer lies somewhere between the “hot” and “cold” glide paths. And it’s not a spot, but rather a path to the end – a (hopefully) comfortable retirement. As was illustrated in the earlier examples, “too hot” (too much risk at the wrong time in a glide path) can have dramatic impacts on a participant’s portfolio balance — both through market losses and reactions to the psychological impacts (abandonment risk). But, being “too cold” (read “not enough of the right type of risk at the right time”) may have significant costs as well (short fall and inflation risks).
Financial professionals are in the best position to understand the unique needs of their clients and help educate them. It’s easy for clients to compare target date investment series on performance. I don’t build a target date series to be compared on performance alone – they have a ‘higher purpose’, i.e., trying to deliver a participant with the better chance of a comfortable retirement. A financial professional can help his or her clients understand how the glide path contributes to the end goal and help them make decisions that positively impact their participants’ ability to meet their retirement goals.
Despite differences in philosophy and glidepaths among target date investment options, they are a solid choice to provide professionally managed asset allocation and risk management for participants of all levels of investment sophistication. This is evident in the use of target date investment options as a Qualified Default Investment Alternative (QDIA) by plan sponsors. More than 70 percent of plan sponsors choose a target date series as a default option for participants who don’t make active choices for their savings.
Default Investment option for Automatic Deferrals
|Default Investment Option||Percentage of Plans|
|Professionally Managed Account||4.6%|
|Stable Value Fund||1.7%|
|Target Retirement Date/Lifecycle Fund||73.3%|
Source: PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans (Reflecting 2012 Plan Experience)
While this appears to be an overwhelming vote of confidence for target date investment options, I’ve pointed out that not all are created equal. So how are we different?
In order to find a balance between different types of risks, I – along with my team – look at the behavior of plan participants in plans record kept by The Principal. We believe that most participants share similar goals: they want to save enough to have a comfortable retirement and not outlive their savings. We then strive to balance the market, abandonment, shortfall and inflation risks that come with target date investing.
Unfortunately, most Americans are not saving enough to ensure success of that outcome; only a third (37 percent) of workers say they are saving enough to live comfortably in retirement. Irrespective of any view on risk, first and foremost, most participants need to save more. Additionally, we believe that they tend to be too modest about their approach to risk in terms of asset allocation when they do it themselves. We see that behavior in our large participant block and it gives us an insight that other target date fund companies may not have.
One of the distinct advantages I have here is that I sit in the kitchen making the porridge. And with approximately 1 million participants in target date portfolios (that’s a lot of Goldilocks!), we monitor participant behavior and statistics and make our conclusions. With the number of participants in a plan, no investment manager can be a short-order cook – and that’s not our goal. But with the insights we have on participant behavior, I’m able to make adjustments to our target date series to try to take the right kind of risk at the right time striving for the best possible portfolio outcome.
As Goldilocks prepares for retirement, her goal is to have a comfortable chair, a soft bed, and maybe a little more travel around the forest; my goal is to create an investment option which helps her get those things.
About Target Date investment options:
Target date portfolios are managed toward a particular target date, or the approximate date the investor is expected to start withdrawing money from the portfolio. As each target date portfolio approaches its target date, the investment mix becomes more conservative by increasing exposure to generally more conservative investments and reducing exposure to typically more aggressive investments. Neither the principal nor the underlying assets of target date portfolios are guaranteed at any time, including the target date. Investment risk remains at all times. Neither asset allocation nor diversification can assure a profit or protect against a loss in down markets. Be sure to see the relevant prospectus or offering document for full discussion of a target date investment option including determination of when the portfolio achieves its most conservative allocation.
Additional Important Information
Investors should carefully consider a mutual fund’s investment objectives, risks, charges and expenses prior to investing. A prospectus, or summary prospectus if available, containing this and other information can be obtained by contacting a financial professional, visiting principal.com, or calling 800-547-7754. Read the prospectus carefully before investing.
Before directing retirement funds to a separate account, investors should carefully consider the investment objectives, risks, charges and expenses of the separate account as well as their individual risk tolerance, time horizon and goals. For additional information contact us at 800-547-7754 or by visiting principal.com.
Delaware Charter Guarantee & Trust Company, conducting business as Principal TrustSM Company (“Principal Trust”), a member of the Principal Financial Group®, maintains various Collective Investment Funds, as trustee, under certain plan and declaration of trust documents, which may be amended from time to time (“Trusts”). Principal Trust has discretion over the investment of the Collective Investment Funds which may only consist of assets of qualified plans. . Principal Management Corporation (“PMC”), an affiliate of Principal Trust, provides nondiscretionary advisory services to Principal Trust with respect to the Collective Investment Funds. The Collective Investment Funds are not guaranteed by Principal Trust, PMC, any of their affiliates, the FDIC or any other governmental agency. Participation in Collective Investment Funds offered by Principal Trust is governed by the terms of the applicable Trust and a Participation Agreement. Visit principal.com to obtain a copy of the relevant Collective Investment Fund Summary document for addition important information.
Investment options are subject to investment risk. Shares or unit values will fluctuate and investments, when redeemed, may be worth more or less than their original cost.
Asset allocation does not guarantee a profit or protect against a loss. Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. International and global investment options are subject to additional risk due to fluctuating exchange rates, foreign accounting and financial policies, and other economic and political environments. These risks are magnified in emerging markets. Investing in real estate, small-cap, international and high-yield investment options involves additional risks.
There is no guarantee that a target date investment will provide adequate income at or through retirement.
Insurance products and plan administrative services are provided by Principal Life Insurance Company. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities are offered through Princor Financial Services Corporation, 800-547-7754, Member SIPC and/or independent broker/dealers. Securities sold by a Princor Registered Representative are offered through Princor®. Principal Funds Distributor, Princor and Principal Life are members of the Principal Financial Group®, Des Moines, IA 50392. Investment options may not be available in all states or U.S. commonwealths. Separate Accounts are available through a group annuity contract with Principal Life Insurance Company. See the group annuity contract for the full name of the Separate Account. Principal Life Insurance Company reserves the right to defer payments or transfers from Principal Life Separate Accounts as permitted by the group annuity contracts providing access to the Separate Accounts or as required by applicable law. Such deferment will be based on factors that may include situations such as: unstable or disorderly financial markets; investment conditions which do not allow for orderly investment transactions; or investment, liquidity and other risks inherent in real estate (such as those associated with general and local economic conditions). If you elect to allocate funds to a Separate Account, you may not be able to immediately withdraw them.
May lose value. Not a deposit. No bank or credit union guarantee. Not insured by any Federal government agency.