FAAF/EC – Stream Consciousness

Some have argued that target-date funds do not accurately estimate individuals' income needs as they switch from the accumulation phase of their working years to the distribution of retirement.

Certain funds become too conservative too soon, only a few have lengthened the investment horizon into retirement, and even those failed to consider risk changes during that important transition. Panelists at PLANSPONSOR’s Future of Asset Allocated Funds conference – East Coast – discussed how asset allocation strategies should tie in with retirement strategies to ensure an adequate retirement income stream for their participants.

Risks Assessment

Scott Warlow, Assistant VP of Strategic Asset Allocation at John Hancock, outlined some risks that plan sponsors should be aware of with this issue. Longevity is certainly a risk, he said, and since many people are not only retiring at an earlier age, but also living longer, there is a possibility that they might outlive their savings. Inflation over time should also be accounted for, as well as any plans a participant might have to leave money for a beneficiary. He warned plan sponsors that a poor market at the start of retirement can decimate an individual’s retirement savings, and that possibility should be taken into account well before their target-date approaches.

Henry Yoshida, Senior financial advisor at Merrill Lynch, agreed, adding that many participants do not contribute enough to their funds. This accumulation risk is very common, and even a well-designed fund will not get participants to a successful retirement if their deferral rates are not adequate. Individuals should maintain at least some level risk even as they approach retirement, and be careful to plan to distribute their savings over roughly ten to twenty years. If they do not want to expose the whole of their investments to further risk, even putting a portion into a relatively conservative fund would be smarter than “cashing out” at the target-date.

Stace Hillbrant, Managing Director at 401k Advisors LLC, an NRP Member firm, described the wide variety of products that are now available. While there is no one solution to help the average American, he said, because while many different products address different problems, there is not yet a more comprehensive or universal solution. Even if executives are well taken care of, those same services are not extended to the average employee, who would probably benefit more from that extra help and is more likely to be unprepared if left alone. Hillbrant said that while there is no consensus among plan sponsors concerning these types of funds, there is discussion, which is a step in the right direction.

He said the issue he was most concerned about was a backlash from participants who were encouraged to move into target-date funds just before or at the market's decline. Not diversifying enough beforehand has been a bigger problem than what he described as the market "blip." The advent of these products has forced a higher level of education for participants, and promises the introduction of new techniques and more involvement from advisors in the future. Most participants are not just interested in retirement plans, he said, and would benefit from good, solid advice about inflation risk, diversification, longevity risk, and the potential for shortfall if individuals do not take some risk with their investments.

Yoshida agreed, pointing out that many participants, who remain idle when the market is doing well, tend to make poor decisions in times of relative crisis. Auto-enrollment, auto-escalation, and qualified default investment alternative (QDIA) choices were approved with the expectation that participants will not act after they have chosen or been placed in a fund. The market decline has brought extreme changes, he said, and for once doing nothing might be the best thing for participants.

- Sara Kelly

"Stream" Consciousness-Ensuring the Retirement Income Stream

Some argue that target-date funds fail to estimate accurately individuals' income needs as they move from their working years to retirement and beyond and, according to others, some funds switch their asset allocation to a conservative mix too soon. Others have lengthened the investment horizon into the retirement years but failed to consider risk. How should asset allocation strategies tie in with retirement income strategies?

Moderator:Alison Cooke , Managing Editor, PLANADVISER


Scott Warlow , Assistant VP Strategic Asset Allocation, John Hancock
Stace A. Hillbrant , Managing Director, 401k Advisors LLC (NRP Member Firm)
Steve Scanlon , Head, Global Sales , AllianceBernstein
Henry Yoshida , Senior Financial Advisor , Merrill Lynch

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