T. Rowe Reaffirms Target-Date Strategy

November 25, 2009 (PLANSPONSOR.com) - Target-date funds with high equity allocation at retirement have come under fire lately, but T. Rowe Price is sticking with its strategy…

Speaking at a press briefing on Tuesday in New York City, Christine Fahlund, a senior financial planner at T. Rowe Price, said the company revisited its research and determined that the funds are “still on track.” T. Rowe’s target-date funds have a 65-year-old in about 55% equities, which is a riskier allocation than some competitors.

Fahlund said she still believes in having equities at retirement, and advocates that retirees stay flexible with retirement dates and what they do in retirement. With “too much cash there’s no return,” Fahlund said. Although participants high in equity at their retirement date risk a significant loss (such as the last year), she contended they can see a worse result just from an unexpected expense in retirement. “We almost have to put on the blinders to what the market’s going to do,” she said.

Target-date funds have also been under the microscope in Washington, specifically because of their differing strategies among financial firms. Cynthia Egan, president of T. Rowe Price Retirement Plan Services, Inc., said that more clarity around education in target-date funds is important, such as a standardization of disclosure so participants understand whether a target-date fund is meant to go “to” or “through” retirement.

As far as tackling retirement income, there is no silver bullet to a specific product solution, Egan said. T. Rowe is continuing to analyze and look at features such as a guaranteed minimum withdrawal benefit (GMWB), but they see “very little interest amongst plan sponsors” for annuitization, she said. “We just at the moment don’t see an enormous appetite; when you think about it, it’s an enormous fiduciary responsibility.”

Participants Hold Their Ground

T. Rowe Price saw most participants didn’t make changes during the downturn. Participation rates did not drop off and have even increased slightly. Outstanding loans and hardship withdrawals did not see significant increases. "We’re not seeing the 401(k) being use as an ATM," said Egan.

Furthermore, while there was a lot of conversation from participants, there wasn’t a lot of activity, said Egan, noting that 96% of participants did nothing to their accounts. Of the 4% of participants who did make transactions, most did transfer their money to more conservative assets.

Egan also said the number of plans offering target-date funds grew slightly. In 2008, 78% of T. Rowe’s plans offered target-date funds; in 2009, more than 80% offer them. Participants are also gravitating more to target-date funds, with about 58% of participants enrolled in target-date funds in 2009, compared to 52% in 2008.