Key in Target-Date Funds: Diversity and Downside Protection

A new research paper about target-date funds finds that the most effective designs include extended and alternative assets and remain highly diversified for the entire investment horizon.

In a news release about its research, JPMorgan Asset Management (JPMAM) said its findings were “conclusive” that ultimately, target-date strategies emphasizing diversification and downside protec­tion were most likely to help the greatest number of participants across all industries reach their retirement funding goals.

This was particularly true, JPMAM said, since:

  • participants’ behavior, which is resistant to change, is still compromising the ability to save and invest, and consequently, diminishing their retirement income security, and
  • the objective to provide downside protection to participants is justified across all industries.

JPMAM asserted that plan sponsors should not dramatically change their target-date strategy unless their industry’s variability is very different from the average of all workers in all professions.

JPMAM’s latest research, “Sharpening Your Aim – Selecting the Best Target Date Strategy for Your Participants,” explores whether differences by industry in workers’ saving and investing behavior should change plan sponsors’ target-date strategies. JPMorgan analyzed data in 10 industries including: Consumer Durables; Consumer Services; Consumer Staples; Energy; Financial; Healthcare; Industrials; Information Technology; Materials and Utilities.

In its announcement, JPMAM mentioned its findings its two industries:

  • Consumer Durables – Above average withdrawals and a below average savings rate for workers in this industry can leave a less than adequate amount of savings available for retirement.
  • Information Technology – Despite above average savings rates, larger than average withdrawals for workers in this industry can decrease participant success rates and increase the need for downside protection.

“Not a lot of people are thinking about the impact of participant behavior on success rates, but they should,” said Anne Lester, Senior Portfolio Manager, Global Multi-Asset Group, JPMorgan Asset Management, in the announcement. “It’s true that plan sponsors have a challenge when it comes to changing participant behavior in the short term, but there is something they can do today – they can choose a well-diversified target-date strategy. This not only will help them satisfy their fiduciary responsibilities, but it is one thing plan sponsors can do quickly that can begin to mitigate the impact of participant behavior. A well diversified target-date portfolio, which achieves a better balance of risk and return, is more likely to get more participants to income replacement safely. Not all target-date fund designs are created equal and this is something for plan sponsors to watch out for.’

A copy of the report is available here.