Study Suggests Lifecycle Funds’ Equity Allocations too High

June 28, 2011 (PLANSPONSOR.com) – The first study by the newly launched Putnam Institute suggests most lifecycle fund offerings in today’s market are too aggressive in their equity exposures.

“Optimal Asset Allocation in Retirement: A Downside Risk Perspective” concludes that the appropriate range of equity allocation in retirement is between 5% and 25% (if an investor’s primary goal is to not outlive his or her assets).   

The study also contends that once an investor begins net withdrawals, the greatest risk to his or her portfolio becomes a potentially unfavorable “sequence of returns” — not inflation, or longevity. A press release said the onset of net withdrawals should be seen as any investor’s “true” target date — and it should also mark the “terminal allocation” — the end of any roll-down or glide path.  

Dr. W. Van Harlow has been named Director of Research of Putnam Institute and will manage its activities.  

Commenting on the study findings, Harlow said: “The optimal asset allocation for retirement portfolios is surprisingly conservative. This study should give any retiree pause when setting an asset allocation path. If reducing the risk of outliving one’s assets is the main goal, then it is critical to limit equity exposure and recognize the impact that investment volatility can have on the sustainability of retirement assets.”   

Harlow holds an MBA, a Ph.D. in financial economics and the Chartered Financial Analyst (CFA) designation. In addition to serving as Director of Research of Putnam Institute, he also serves as Director, Investment Retirement Solutions, at Putnam Investments.  

The research can be found at http://www.putnaminstitute.com.

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