Gliding into retirement

Target date retirement funds emerged
on the scene as investment vehicles
about 10 years ago. Widely popular among 401(k) plan participants, the plans
are designed to make retirement investing
easier for those who lack the time or the
expertise to manage their own retirement
fund investments.

The plans are designed to provide a “plug
and play” scenario for investors who begin
by initially selecting their projected retirement date and then continually fund the
account over the course of their career.
The plan relies on a glide path investment
strategy, which gradually rebalances the portfolio comprised of cash, bonds and
stocks toward a more conservative investment allocation as the time for retirement
nears. Despite the fund’s low maintenance
philosophy, each target date fund has a different allocation model, and plan participants still need coaching and communication from plan sponsors to avoid making
mistakes when investing, says Michael
Ford, senior investment consultant with
Watson Wyatt Investment Consulting, a
subsidiary of Watson Wyatt Worldwide.

“As we study 401(k) participant behavior,
aside from not saving enough for retirement, participants often fail to take enough
risk, or they take too much risk with their
fund choices,” says Ford. “In the case of
target date retirement funds, a frequent
participant mistake results from altering
the asset allocation model by investing in
more than one fund. All of these mistakes
may cause 401(k) participants to be financially unprepared for retirement.”

Smart Business spoke with Ford about
how CEOs can help employees invest
wisely in target date retirement funds.

What is the most common investment mistake made by employees when investing in
target date retirement funds?

The funds are designed to be all-inclusive
investments. Frequently, plan participants
become accustomed to spreading their
investments among many different investment vehicles, like mutual funds, so naturally they are inclined to do the same thing
with target date retirement funds.
However, in this case, investing across multiple funds alters the glide path investment strategy, which, in turn, might cause
plan participants to miss their financial
retirement goals. It’s really not designed to
be a mix-and-match investment concept.

How do retirement date funds fit into a plan
sponsor’s full suite of investment options for
employees?

It’s important to recognize that one size
does not fit all when it comes to assisting
employees with retirement planning. Each
employee has a different risk tolerance,
financial circumstance and level of investment savvy. We advocate structuring investment options into three tiers, with each
tier appealing to different segments of the
employee population.

  • Tier one — Target Date Retirement
    Funds: this tier is designed for participants
    who don’t want to make asset allocation
    decisions and would rather have someone
    else do it for them.

  • Tier two — Core Options: this tier is
    designed for participants who want to
    make their own asset allocation decisions
    from a set list of investment options.

  • Tier three — Brokerage Window:
    designed for the small percentage of sophisticated investors who want maximum choice in their investments.

How can CEOs and plan sponsors help
employees manage their retirement funds
more effectively?

Communication and consultation with
employees is absolutely vital. Plan sponsors should provide tools to participants
that help them assess their risk tolerance
and investment knowledge. If they are a
tier one investor, it is important to communicate that this is a stand-alone investment
option, not to be mixed with assets from
the other tiers.

Plan sponsors should communicate with
participants initially upon enrollment and
then at least every six months about the
nature of target date retirement funds and
the investment strategy behind them. At
Watson Wyatt, we recommend varying the
communication method from print materials to in-person meetings to accommodate
the needs of a diverse employee base.

What is the role of the plan sponsor’s record
keeper in safeguarding employees?

Plan sponsors should coordinate safeguarding efforts with their record keeper
to prevent tier one participants from mixing their allocations among other tier one
funds or crossing their investments into
the other tiers. Some record keepers are
able to put safeguards in place that will not
allow participants to mix asset allocations,
so keep this in mind as you establish your
selection criteria for record keepers.

With more and more employees taking
on the responsibility of financially securing
their own retirement, employers need to
assist them by providing tools and the
proper oversight of plan record keepers.
Used properly, target date retirement funds
can provide a majority of plan participants
with a highly effective investment solution
to help them save for their retirement

MICHAEL FORD is a senior investment consultant for Watson
Wyatt Investment Consulting, a subsidiary of Watson Wyatt
Worldwide. He is a seasoned professional with 23 years of extensive and diverse experience in the investment field. Reach him at
(818) 623-4500 or [email protected].