The Markets May 12, 2009

Providers Scutinizing Target-Date Funds More Closely

A survey from Callan suggests managers of target-date funds have stepped up examinations of their offerings due to the economic downturn.
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The study, published by the Callan Investments Institute, surveyed 30 fund managers in March. Callan found that the majority of providers (53.3%) evaluate their glide paths annually, and 23.3% do so quarterly. However, due to recent market events, 85% of fund managers examined their glide paths between October 2008 and March 2009, according to a Callan release about The 2009 Callan Target Date Fund Manager Survey.

Just more than a third (34.5%) of fund managers made changes as a result of the interim review. Some managers that did make adjustments reduced the aggressiveness of the glide path, while others chose to improve diversification, Callan said.

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“The majority of target-date fund managers are avoiding a knee-jerk reaction to the market crisis,” said Lucas, in the relesase. “They continue to examine the situation closely, but are being measured in their response.”

Aside from altering the glide path, 54.5% of managers made other target-date fund changes within the past six months. The most common change was to underlying funds/managers employed in the target-date funds (61.1%).

“Target-date fund managers know they are going to be held accountable for performance by managers within their funds and many are being proactive about eliminating under performers,’ said Lucas.

Anatomy of Target-Date Funds

Target-date fund glide paths continue to vary widely in terms of equity exposure and shifts in allocation over time across funds, according to Callan. However, variations are most profound in nearer-term funds.

Callan said equity allocations for 2010 funds in the survey sample range from more than 60% to less than 20%. Some later series’ target-date funds have equity exposure that is most conservative at retirement, while others will glide down well into retirement.

Variations in equity allocation and the use of asset classes can materially affect target-date fund performance, Callan noted. The worst performing 2010 fund in the sample lost 15.87% in the fourth quarter of 2008 and 34.48% for the year, while the best performing 2010 fund lost 6.20% and 12.92%, respectively.

Nearly 67% of managers reported that they take a strategic approach to asset allocation compared to 6% that take a tactical approach.

More information is available at www.callan.com.

Compliance May 12, 2009

EBSA/SEC to Hold Target-Date Hearing

The Department of Labor (DoL) and the Securities and Exchange Commission (SEC) are looking into target-date funds.
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The DoL’s Employee Benefits Security Administration (EBSA) and the SEC will jointly hold a one-day hearing on June 18 to explore issues relating to target-date funds and other similar investment options.

“As target date funds and similar investment options become increasingly popular, it is important that all investors, including 401(k) plan sponsors and participants, can adequately evaluate these investment options and safeguard their interests,” the EBSA said on its Web site. According to the agency, the hearing will focus generally on issues facing investors in these types of products, and will explore topics such as portfolio composition, risk, and disclosure.

The agencies say they anticipate that witnesses will include representatives of plan participants and beneficiaries, plan sponsors, investor organizations, academia, and the financial services industry.

The hearing will be held at the U.S. Department of Labor, 200 Constitution Ave., NW, Washington, D.C. Details concerning the hearing will be announced within the next few weeks.

After a hearing in February, the U.S. Senate Special Committee on Aging noted that the DoL has issued regulations allowing target-date funds to be used as a qualified default investment alternative (QDIA) in employer-sponsored retirement plans, but there are no requirements regarding the composition of target-date funds and the appropriate ratio of stocks and bonds as the fund nears its target (see “Senate Committee Takes Aim at Target-Date Funds’).

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Committee Chairman Senator Herb Kohl (D-Wisconsin), sent letters to U.S. Secretary of Labor Hilda Solis and SEC Chair Mary Schapiro, “urging them to immediately commence a review of target-date funds and begin work on regulations to protect plan participants.”

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