John Doyle, SVP, Defined Contribution
American FundsPA: Given the recent focus on fees and lawsuits, is a
retirement plan advisor correct in thinking that a safer option in advising
plan sponsor clients is selecting low cost, passive investments?
DOYLE: Fees are predictable and tangible, which makes them
an easy factor to gravitate to for a lot of people. That’s why you hear that
it’s all about fees in a lot of the cases that keep coming up. Fees are
important, but they shouldn’t be the only thing advisors look at. When you
think about the job of a plan sponsor and the job of the advisors who are
working with their client, it’s to adjust for the needs of the participants
within the plan.
I think you need to look at what your objectives are for the
plan, and how the Qualified Default Investment Alternative (QDIA) or target
date fund (TDF) will address the needed participant outcomes. It’s about the
best solution you can provide to help participants retire when they want to,
and retire with dignity.
PA: American Funds has seen significant growth and inflows
into its TDFs. What do you think is driving that?
DOYLE: We’re proud to have grown to now the fourth largest
target date mutual funds series, and I think there are a couple of things
driving that. First is a unique glide path within a glide path that plan
sponsors are really starting to understand, where we change the makeup of the
equity and fixed income allocations as an individual goes from accumulation
Another thing we’ve seen a lot of, especially after the
Department of Labor (DOL) came out with its TDF tips, is a focus by advisors
and their clients on looking beyond the proprietary funds of their
recordkeeper. They’re starting to understand that it’s really a two-step process:
first, make a decision on the investment lineup and the QDIA, and then decide
on the administrator that can recordkeep and work around the investments you’ve
selected. If plan sponsors really want to have a positive impact on the
participants and their plan for their employees, the investments and the QDIA
they offer are probably the most important decisions.
PA: How should advisors evaluate target date funds? Are
there tools to help them analyze the differences between the funds and which
might work best for their clients?
DOYLE: What we’re starting to see some of the seasoned
advisors do is look at the risk taken to get the returns that the TDF delivers.
They’re making sure they understand what the glide path is and how it breaks
down at a sub-asset class level within the equity and the fixed income portion,
and they’re really looking at the volatility numbers, such as standard
deviation, Sharpe ratios and other statistics.
There are tools out there that allow a plan sponsor and the
advisor to compare and contrast, but the challenge is that they take an advisor
through a questionnaire, and they lead them to a recommendation based on an
interpretation of the results by the developer of the tool. So one of the
things we did at American Funds was develop a tool that really is focused on
allowing an advisor to compare and contrast, using all Morningstar data, all
the different share classes, any four target date mutual funds. It doesn’t have
to be American Funds. The ProView tool helps advisors make decisions with their
client, identify what the objectives are for that client and be able to drive
to a decision on what is the best QDIA for their needs and plan.
Each target date fund is composed of a mix of the American
Funds and is subject to the risks and returns of the underlying funds.
Investing outside the United States involves risks such as currency
fluctuations, periods of illiquidity and price volatility as more fully
described in the funds’ prospectuses. These risks may be heightened in
connection with investments in developing countries. Small-company stocks
entail additional risks, and they can fluctuate in price more than larger
Lower rated bonds are subject to greater fluctuations in
value and risk of loss of income and principal than are higher rated bonds. The
return of principal for bond funds and for funds with underlying bond holdings
is not guaranteed. Fund shares are subject to the same interest rate, inflation
and credit risks associated with the underlying bond holdings. Shares of U.S.
Government Securities Fund are not guaranteed by the U.S. government.
Securities offered through American Funds Distributors, Inc.
Investments are not FDIC-insured, nor are they deposits of
or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives,
risks, charges and expenses. This and other important information is contained
in the fund prospectuses and summary prospectuses, which can be obtained from a
financial professional and should be read carefully before investing.