SEC eyes target-date funds

Target-date retirement funds are on the agenda this year on Capitol Hill as federal lawmakers and regulators promise to review how the funds are structured and sold.

Designed to be a one-stop solution for investors, target-date retirement funds use a mix of stock and bond funds with dynamic allocations that shift over time, typically becoming more conservative as they approach the target date.

But in the market meltdown of 2008, many 2010 target-date funds suffered double-digit losses due to varying equity exposure. For example, the 2010 target date funds – intended for those retiring on or around this year – experienced an average loss of 23.3% in 2008, according to a study by Ibbotson Associates.

Federal leaders have promised to establish tighter controls on how the funds are offered. And SEC Chair Mary Schapiro has said the agency is examining how the funds are marketed, including enhanced disclosure.

In a speech on February 5, 2010, in Washington, DC, Ms. Schapiro said she has asked SEC staff to prepare a rule proposal that will “provide additional information to investors when a fund includes a date in its name.” She also wants proposed rules around marketing. “We are going to confront the issue of the potential for target-date fund names to confuse investors or lull them into a false sense of security,” she said.

Federal legislators, including Senator Herb Kohl (D, WI), chair of the Senate Special Committee on Aging, are also looking for more transparency and regulation of target-date funds.

Putnam has already called on political and industry leaders to make 2010 the year to strengthen the nation’s retirement savings systems.

As political and business leaders continue to look for solutions to the challenges faced by investors saving for retirement, Putnam has already implemented some creative solutions to seek to mitigate volatility and provide more resilient asset allocation strategies for those approaching retirement age.

Putnam’s RetirementReady® Funds last year became the first lifecycle retirement funds to incorporate absolute return strategies within the funds to seek to reduce volatility.

Our suite of absolute return funds aims to deliver real returns that are 1%, 3%, 5%, or 7% above inflation, as measured by Treasury bills over a running three-year average. The funds seek to do this with lower volatility than traditional relative-return mutual funds.

Putnam RetirementReady Funds glide path

Putnam’s RetirementReady Funds feature an automatic transition, or roll-down, from traditional asst allocation structures to an increasing share of absolute return strategies as a retirement date approaches.

These new strategies are one example of the type of innovation needed as part of today’s discussion about saving for retirement.

Whatever reforms are enacted nationally, the over-arching goal remains the same: to reliably replace a substantial share of pre-retirement income for life.

Each RetirementReady Fund has a different target date indicating when the fund’s investors expect to retire and begin withdrawing assets from their account. The dates range from 2010 to 2050 in five-year intervals, with the exception of the Maturity Fund, which is designed for investors at or near retirement.
The funds are generally weighted more heavily toward more aggressive, higher-risk investments when the target date of the fund is far off, and more conservative, lower-risk investments when the target date of the fund is near. This means that both the risk of your investment and your potential return are reduced as the target date of the particular fund approaches, although there can be no assurance that any one fund will have less risk or more reward than any other fund.
The principal value of the funds is not guaranteed at any time, including the target date.