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Ease Investor Anxiety with Target Date Funds
and Asset Allocation
IN A
DOWN market like we’re seeing now, 401(k) plan
participants can start feeling a bit queasy while
watching their retirement savings rise and fall like
ships at sea.
Many
investors understand that a buy-and-hold strategy will
likely even out the roughness of the market in the long
run. But some are less prepared to handle the ups and
downs and resort to the sort of “emotional investing”
that rarely pays off.
While
taking an active role in retirement planning may be fine
for certain investors, in troubled economic times, some
participants are better off letting the professionals
manage their investments. That’s why providers and plan
sponsors should consider incorporating asset allocation
modeling, asset allocation funds and target date funds
to their plans.
While the
market will ultimately determine the performance of
these funds, participants can at least be reassured that
their investments are prudently selected and managed by
professional fund managers who have access to far more
tools and information than the average investor. While
jumping from fund to fund may work may work occasionally
– everyone gets lucky sometimes – the average investor
is generally not prepared to beat the market.
Let’s look
at the upsides and downsides of target date funds and
asset allocation strategies.
Target
Date Funds
Target date
funds (also called target maturity funds and lifecycle
funds) automatically rebalance on a preset schedule to
become more conservative and income-producing as the
participant’s target retirement date approaches. This
takes the burden and stress of maintaining appropriate
levels of risk and diversity off of the participant and
into the hands of experienced fund managers who guide
the assets along a path of decreasing risk over time.
The current
popularity of target date funds is partially due to the
2006 Pension Protection Act’s provisions for
auto-enrollment. Target date funds make for safe and
logical default investments for auto-enrolled plan
participants, especially for younger, more inexperienced
investors.
The
downside for investors, of course, is less control over
where their money is invested. But in troubled times,
even experienced and active participants may want to
seek shelter in these well-managed and diversified
funds. Sometimes your better option is to let a pro take
the wheel.
Asset
Allocation Funds and Models
If target
date funds aren’t an option, or if participants want a
more hands-on approach, asset allocation modeling can
help participants effectively determine their risk
tolerance and guide them into investments that match
their goals.
Asset
allocation modeling helps participants determine their
retirement options by asking a series of questions,
typically in a short questionnaire, that assess their
tolerance for financial risk. Their responses determine
their risk tolerance on a scale from “conservative” to
“aggressive”. Once their tolerance is determined,
participants receive a suggested portfolio of investment
options that matches their target risk level.
Alternatively, plan sponsors can offer participants a
predetermined series of risk-based asset allocation
funds – also called lifestyle funds – that match their
risk tolerance. Lifestyle funds maintain a consistent
risk level and are generally categorized as
“conservative,” “moderate,” or “aggressive”.
Asset
allocation modeling can help less experienced investors
attain diversified and risk-appropriate holdings with
more control over the direction of their investments
than target date funds. But unlike target-date funds,
asset allocation is not on auto-pilot. Participants need
to periodically reassess their risk tolerance to
determine if their portfolio still meets their comfort
level.
Take out
the emotion
Some
investors get a charge out of the ups and downs of the
market, some get seasick. But during tougher economic
times, all investors should examine who can better
manage their money: the pros or their emotional selves.
Headquartered in Bellevue, Wash., Symetra Financial
Corporation provides retirement plans, employee
benefits, life insurance and annuities through a
national network of independent advisors and agents. For
more information, visit
www.symetra.com.
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