Yet, risk-based funds have been around longer, and have established track records. Should your plan investment menu include both risk- and date-based solutions?
align=”center”> The Panel Audio File
Panel members at PLANSPONSOR’s 2008 Future of Asset Allocated Funds Conference in Newport Beach, California, seemed to agree investment menus should include risk-based funds.
Gene Huxhold, Sr. Managing Director Investment Only Retirement Plans, John Hancock, pointed out that risk-based funds are covered by the QDIA regulations and fall under the balanced fund category. He contended that it would be easier to place participants in risk-based funds than in target-date funds.
Brian Ward, Managing Director-Investment Officer, Senior Institutional Consultant, Ward Financial Advisory of Wachovia Securities, added that risk-based funds are easier for participants to understand than target-date funds. Participants are familiar with the concepts of conservative, moderate, and risky investing, and many do not understand the glide paths and risks of target-date funds, he said.
In addition, Ward contended the 10-year increments of most target-date fund series creates confusion when selecting a fund for participants who do not plan to retire in that particular year. Ward also noted that even when risk-based funds did not yet have an established track record, participants chose them and even opted out of the default investment into risk-based funds. Now that they do have an established track record, he noted, we can see the funds have done well.
The need for both risk-based and date-based funds within a retirement plan is driven by the type of investors each attracts. John Lunt, President, Lunt Capital Management, said target-date funds are for participants who just will not engage at all in managing their retirement assets, while risk-based funds are better for participants who will engage. This indicates risk-based funds are probably more appropriate as an investment option in retirement plans, but not as the default investment, he said.
Lunt contended that the advantage of participants’ understanding the risks associated with the two different investment types will be seen in the next 12 months as participants see the results of the bad market of late.
Ward concluded that the decision whether to include risk-based funds in a plan’s investment menu is plan-specific, and may require consultation with an adviser.