Sponsors Should Carefully Eye Target-Date Equity Allocation

May 20, 2008 (PLANSPONSOR.com) - Defined contribution participants nearing retirement may be shocked at the asset allocation to equities in their target-date funds, Watson Wyatt said in a new research paper.

In a news release, Watson Wyatt said some target-date funds may retain more risk by allocating more to equities than might be optimal. For example, some funds for employees expecting to retire in 2010 still have almost 70% of assets in equities, according to recent Morningstar Direct research.

The company said its analysis of target-date funds has shown considerable variability in asset allocations. For instance, in 2006, allocations to equities for employees 10 years from retirement varied from 80% to 40% among target-date funds. Equity allocations for employees on their retirement day ranged from 65% to 20%.

“The lack of consistent philosophies in this area means that products with very similar names can have very different compositions,” said Robyn Credico, national director of Watson Wyatt’s defined contribution practice, in the news release. “As more employers begin to automatically enroll employees who do not choose 401(k) investments in target-date funds, understanding the amount of return received for the risk grows in importance. If the funds are not appropriately matched with employees’ needs, employers could see many workers delay their retirements.”

More information about target-date funds can be found at http://www.watsonwyatt.com/targetdatefunds.