Aligning Beliefs: 7 Tenets of Russell Investments Target Date Funds
Aligning beliefs: 7 tenets of Russell Investments target date funds
July 29
John Greves
Target date funds (TDFs) are among the most widely used retirement solutions today; however, plan sponsors’ satisfaction levels with their own funds often vary as a result of their recent experience. Typically, satisfaction levels wane as market cycles lead to fluctuating returns and questions arise about whether risk levels are too high or too low. During such periods, plan sponsors are often vulnerable to making reactionary decisions not in the best interests of participants. I believe it is important for both plan sponsors and fund providers to identify their beliefs around strategy and risk management in order to align expectations for potential outcomes at various points in the market cycle.
Russell Investments’ core beliefs for target date fund exposures and investment strategies are outlined in the list below of our seven tenets. I encourage plan sponsors to read through this list and think about their own committee’s beliefs on the best way to help participants balance the need to meet retirement objectives amid uncertainty from market risk.
In our case, based on our core beliefs, Russell Investments’ target date funds are formulated to:
1. Assume more risk for young participants and manage risk conservatively for those near retirement. We typically heavily allocate to growth assets, such as equities, during the first half of a participant’s career when future earnings power and retirement contribution potential is plentiful. During the second half of a career, we manage risk more conservatively to limit the magnitude of potential losses and mitigate the risk of falling short of retirement goals.
2. Adhere to a static investment strategy in retirement. Generally, the riskiest day of retirement is the first day. Why? Investment funds must last the longest on that day. This is one reason Russell Investments takes a conservative, sustainable approach to risk after retirement in its TDFs. Continuing to reduce risk during retirement may lock in losses as withdrawals take place, reducing sustainability.
3. Further diversify through global exposures. Many target date funds are U.S. centric, which results in too much reliance on the vagaries of the U.S. economy. Currently, the United States represents 52% of the world’s total market cap1, but many target date fund allocations to U.S. equities are 68%2. Russell Investments TDFs’ allocations are usually more closely aligned with the market’s valuation of global securities.
4. Include real assets. Adding real estate, commodities and infrastructure, for example, to a TDF may help to further diversify an overall retirement portfolio. We believe many target date funds are too reliant on equities and bonds that may make them vulnerable to certain types of inflation.
5. Benefit from both active and passive investment management. Passive management can help control costs, but, when used alone, it may result in lost opportunities. There are rewarding possibilities for active management within certain areas of financial markets. A thoughtful mix of active and passive management can help to capture the best of both approaches.
6. Dynamically adapt to the market environment. While TDFs have long-term investment horizons, the “set it and forget it” approach doesn’t accommodate the continually evolving market environment. Dynamic management helps to provide investors with an opportunity to make modest portfolio changes based on market conditions.
7. Employ “best-of-breed” solutions. Any one investment organization is hard pressed to serve as an effective specialist for each asset class or sub-asset class. Our preference is to maintain a flexible, open architecture structure that helps to reduce manager concentration and stabilize excess return patterns.
Overall, better alignment between a plan sponsor’s expectations and a target date provider’s beliefs helps improve the use of target date funds and reduces the risk of reactionary decisions that are not in the best interests of participants.
For more information on the core beliefs guiding our target date funds, please read Russell’s beliefs in building institutional-quality target date solutions.
1 Factset based on the Russell Global Index
2 Morningstar Universe of 2050 funds
Disclosures
This material is not an offer, solicitation or recommendation to purchase any security. Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Target date fund investing involves risk, principal loss is possible. The principal value of the fund is not guaranteed at any time, including the target date. The target date is the approximate date when investors plan to retire and would likely stop making new investments in the fund.
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