Target-Date Funds Require Better Benchmarking, Watson Wyatt Says

Poor Returns Highlight Need for Improved Understanding and Communication of Risk 


WASHINGTON, June 17  /PRNewswire-FirstCall/ -- With Congress getting ready to scrutinize target-date funds (TDFs), the time is right for fund managers to take a closer look at the risks inherent in their funds and communicate these risks to plan sponsors, according to investment experts at Watson Wyatt, a leading global consulting firm. One way to do this is to adopt benchmarking policies that more closely reflect the long-term goal of saving for retirement that the funds are trying to achieve.

"Many 401(k) participants learned the hard way that there was more risk in target-date funds than they expected," said Carl Hess, global head of investment consulting at Watson Wyatt. "The impact is particularly jarring for those close to retirement, as many shorter-horizon funds had negative returns more commonly associated with funds that have a much longer retirement horizon. The issue comes down to comparability -- even funds within the same target retirement years have widely varying risk profiles and investment allocations."

A Watson Wyatt analysis of 72 target-date funds shows great variation in stock allocations from fund to fund. Shorter-horizon funds contained a range of 32 to 80 percent in equities, while longer-horizon funds contained a slightly higher range of 51 percent to 95 percent in equities. Returns on funds have likewise varied: TDFs with a target date of 2010, which are intended to be relatively conservative, had a median return of negative 31.9 percent between October 2007 and February 2009, while funds with a target date of 2050/55 had a median return of negative 47.5 percent. Although the 2010 horizon funds declined by almost 16 percentage points less than long-horizon funds, the losses for workers very close to retirement were substantial.

"One of the many challenges facing target-date fund managers is how to provide and communicate an accurate comparison of a fund's true portfolio risk profile," said Mark Ruloff, director of asset allocation at Watson Wyatt. "Utilizing an appropriate benchmarking system would create an equal platform to compare different target year returns, and allow employers to help employees evaluate whether they are on the right track to achieve financial security in their retirement."

"Despite falling short in some areas, target-date funds are still a key investment option in retirement plans. Now, Congress has an opportunity to step up and provide sorely-needed protection to help target-date funds live up to their promise," concluded Hess.

For more information about our views on TDF benchmarking, please visit: http://www.watsonwyatt.com/research/whitepapers/wprender.asp?id=WT-2009-12257

For more information about our views on restructuring TDFs, please visit: http://www.watsonwyatt.com/research/whitepapers/wprender.asp?id=WT-2009-12327

About Watson Wyatt Investment Consulting

Watson Wyatt Investment Consulting, a division of Watson Wyatt, is focused on creating financial value for institutional investors through independent, best-in-class investment advice. We are specialist investment professionals who provide coordinated investment strategy advice based on expertise in risk assessment, strategic asset allocation and investment manager selection.

Watson Wyatt Investment Consulting provides investment advice to some of the world's largest pension funds and institutional investors, and has more than 550 associates in Europe, the Americas and Asia.

In the United States, investment advisory and investment consulting services are provided by Watson Wyatt Investment Consulting, Inc., which is a subsidiary of Watson Wyatt Worldwide Inc. Watson Wyatt Investment Consulting, Inc., is a registered investment adviser with the Securities and Exchange Commission.

About Watson Wyatt

Watson Wyatt (NYSE:WWNASDAQ:WW) is the trusted business partner to the world's leading organizations on people and financial issues. The firm's global services include: managing the cost and effectiveness of employee benefit programs; developing attraction, retention and reward strategies; advising pension plan sponsors and other institutions on optimal investment strategies; providing strategic and financial advice to insurance and financial services companies; and delivering related technology, outsourcing and data services. Watson Wyatt has 7,700 associates in 34 countries and is located on the Web at http://www.watsonwyatt.com/. 

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