Complexes offering target-date funds will soon be joined by a hefty new entrant: American Funds, the 800-pound gorilla, which, year to date through August, has attracted more than 37% of the $123 billion in assets flowing to the top 50 fund complexes, according to Financial Research Corp. of Boston.
Last week, Capital Research and Management of Los Angeles, adviser to the American Funds, filed a red herring registration statement with the Securities and Exchange Commission announcing nine new target-retirement date fund-of-funds structured in five-year intervals beginning with 2010 and running through 2050. Each will embrace increasingly more conservative funds as it moves toward its specific retirement year goal.
The filing, which lacks specifics such as precise expenses for each fund, was filed now so as to garner the SEC's approval and get the funds launched as early as February, said company spokesman Chuck Freadhoff.
In all, 21 of Capital Research's 30 American Funds will provide the underlying investment funds, but the exact allocations for each of the target-retirement funds has not yet been decided, nor have specific portfolio managers been named. The mix will include popular veteran funds Growth Fund of America, the Investment Company of America and Washington Mutual Investors, as well as the Short-Term Bond Fund of America, which launched a few weeks ago.
According to its registration statement, Capital Research will continue managing the target-retirement funds for a full three decades beyond each individual fund's retirement year, although target funds may be combined after their 20th year past expiration. That gives a whole new dimension to long-term investing since Capital Research is making a 74-year commitment with its most futuristic 2050 fund.
The funds will, at least initially and possibly eternally, charge no management fees since each of the underlying funds already imposes its own. Moreover, the funds will offer five retirement plan share classes. The fund complex first began offering five R-shares, each with different expenses, in mid-2002.
Capital Research is among a growing number of fund advisors scrambling to create target-retirement funds suited to the needs of participants in 401(k) plans, particularly those afflicted with investment paralysis.
Under the Pension Protection Act of 2006, in order to increase defined contribution plan participation among employees, employers will be allowed to automatically enroll new employees in their plan. Participants can then opt out altogether, amend initial contribution levels, or change default investment options chosen by plan sponsors.
"It's the passage of the pension reform act within the altered defined contribution landscape that made these changes, including the qualified default option," Freadhoff noted. "We have a lot of shareholders who will want this type of option: to put money in and not have to worry about changing it."
American Funds' goal will be to get the funds onto various retirement fund platforms and into the toolboxes of financial intermediaries through its 100-plus wholesalers.
But the Department of Labor (DOL), which presides over the Employee Benefits Security Administration, was empowered to determine exactly which default investment options employers may utilize.
In its Sept. 27 proposed rules, the DOL outright nixed money funds, stable value funds, bank deposits and most companies' stock as allowable default options. It mandated three viable selections: a fund or model portfolio providing varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures based on a participant's age, target retirement date or life expectancy (such as a lifecycle or target-date fund); a fund or model portfolio providing appreciation and capital preservation through a mix of equities and fixed-income exposures that are consistent with a "target level of risk appropriate for participants of the plan as a whole" that cannot be calibrated for each participant (such as a balanced fund); or an investment management service (such as separate accounts) that allocates assets across equity and fixed-income products.
"If you are a major mutual fund, you cannot afford not to offer target-retirement funds as you'll be missing out on the asset flows," said Chad Parks, founder, president and CEO of The Online 401(k) of San Francisco, a third-party administrator and recordkeeper for small defined contribution plans. Parks thinks target-retirement funds can be a great solution because they take the path of least resistance and serve the greater good with an easy format.
"Target-date funds have an advantage in that they are simplistic and easy to implement from the client's perspective. You pick a date and everything else is done for them," said Neil Wolfson, president of Wilmington Trust Investment Management. "But their simplicity is their disadvantage," he added. Factors such as risk tolerance, objectives and non-retirement assets aren't factored into the asset allocation. "Two individuals with exactly the same retirement date may have very different needs," he added.
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