The MarketsMay 20, 2010

FRC Recommends Restructure of Target-Date Funds

In a new study, “Rethinking Lifecycle Funds,” Financial Research Corporation (FRC) says that although target-date funds are being marketed as a total retirement solution, the reality is that investors are using them as a small part of their overall retirement plan.

Reported by Rebecca Moore

FRC estimates target-date funds will grow to $880 billion in assets by 2015, while target-risk funds grow to $300 billion, according to a company announcement. Nearly 90% of the mutual fund marketplace is open for the growth of lifecycle funds or non-lifecycle funds.

In the study, FRC provides recommendations for product reconstruction, including:

Lower equity allocations;
Implement a “to retirement” glide path;
Market product as a core mutual fund to be used with satellite investments;
Match equity allocations to an investor’s stated risk tolerance; and
Change fund names to reflect risk levels.

“Given that investors have a wide range of financial and nonfinancial unknowns—black box holdings—providers should lower risk levels and make target-date funds as transparent as target-risk funds to allow investors safer adoption of these funds into their overall portfolio,” states Lynette DeWitt, study author and director of lifecycle fund research at FRC, in a press release. “Firms who are able to reconstruct and market their products to align them more closely with the needs of today’s investors will be most likely to gain traction.”

Given that target-risk funds provide better information about their risk levels, FRC recommends these funds as better options from a fiduciary protection standpoint.

FRC’s research can be purchased from http://www.frcnet.com.