As the economic slump curbs retirement savings and the government considers imposing curbs on target-date funds, Great-West Retirement Services is trying out what its president is calling "the next generation" of target-date funds.

In creating the Maxim Lifetime Asset Allocation Series funds, the company had the limitations of earlier-vintage target-date funds in mind, said Charlie Nelson, its president. "The design of these funds is focused to address a number of the concerns from the industry, regulators and Congress," Nelson said.

Those concerns focus on performance. According to the research firm Lipper, on average target-date funds that mature in 2010 lost almost 25% last year.

Funds with near-term target dates were supposed to be extremely low-risk, so the lousy results have led Congress to question whether legislation is needed to protect aging Americans.

Great West's Maxim Lifetime Asset Allocation Series, which the Greenwood Village, Colo., company unveiled June 15, differs from most target-date funds in that it offers three "glidepaths," or ways in which their allocations change over time: conservative, moderate or aggressive.

The asset allocation is designed to continue past the funds' retirement target dates. Nelson described the funds as "hybrids between target-risk and target-date funds," also known as lifestyle and lifecycle categories.

Great-West Retirement Services, a unit of Great-West Life and Annuity Insurance Co., is also touting its third-party consultation: Ibbotsen Associates helps determine each fund's asset allocation strategy.

Twenty investment managers run the funds, and 28 underlying funds are used in the typical fund-of-funds approach for target-date funds, which is designed to ensure diversified asset allocation. The funds also blend active and passive management, according to Great-West.

Doug Dannemiller, a senior analyst with Aite Group, said these types of offerings could do well. "There is plenty of room for good income products to be associated with defined contribution plans," he said.

But he said target-date funds have considerable shortcomings despite the improvements Great-West and others make. An actively managed portfolio is preferable to a "set it and forget it" model, he said, because it lets investors reallocate their portfolios when markets are rising or falling abruptly, and to keep a hand on and an eye on their investments.

For engaged, sophisticated investors, choices like exchange-traded funds, with the guidance of an adviser, are optimal. At the same time, if an investor is totally disengaged from their retirement portfolio, strategy and goals, target-date funds are preferable to money market funds as a defined contribution default option, Dannemiller said.

Great-West started designing its Maxim target-date funds last fall amid concern about declines in retirement plans. Overall, defined contribution retirement accounts fell 21% in 2008 to $3.8 trillion, according to Spectrem Group, a Chicago research company.

"We started hearing concerns by plan sponsors," and there were "some worries in Washington," Nelson said. "We felt there was the opportunity to come forward with an enhanced solution."

Great-West, which has 60 wholesalers for its retirement products, plans to hire a dedicated wholesaler for the target-date funds.

The company is hoping that the funds will appeal to sponsors as having a strong fiduciary process, Nelson said. "The risk component in the first generation was not clearly understood by some," he said. "We are trying to provide tools to plan sponsors to help them figure out which is the most appropriate one for their organization."

Banks can expect to hear more about Great-West's expanded product roster shortly: The company has added "a handful" of dedicated bank channel wholesalers within the past three months, Nelson said.

Great-West plans to roll out more retirement income products for the defined contribution market by the fourth quarter, Nelson said. "Most of the guaranteed-income solution products in the market were individual variable annuity products that were retrofitted for the retirement market," he said. "We're trying to address them specifically as a product just for the retirement market."

Great-West is not the only company touting new and improved alternatives to retirement-focused investment products. Last month, John Hancock Financial Services, a Boston unit of Toronto's Manulife Financial Corp., introduced AnnuityNote, a stripped-down annuity with a built-in income guarantee. The product, which Hancock is positioning as an alternative to more complicated and expensive variable annuities, is built to compete with mutual funds, said Tom Mullen, the chief marketing officer for John Hancock variable annuities.

Cerulli Recommends Process Over Product For Retirement Income

Everyone knows that clients' top concern is having enough money to last through retirement, but how to do that remains in question, and polls show that many advisers find retirement income too complicated to tackle. According to the latest retirement report from Cerulli, it is the process and not the products that will drive retirement income planning. "The current mantra in the industry contends that process, not product, needs to be forefront in the development of retirement income solutions," reads the report.

The retirement income planning process should incorporate tax-efficient strategies, methods of apportioning clients' money depending on their needs, healthcare cost planning, hybrid investment solutions and laddering investment strategies to protect assets as clients transition to retirement. Several industry organizations, like the Retirement Income Industry Association, have endorsed that approach, Cerulli said, but asset managers have lagged in adopting that thinking. Eighty-two percent of assets managers surveyed in 2008 said the need for retirement income was a main driver of product innovation, showing they are still more focused on products than on comprehensive processes, said the study.

Even though 83% of all households surveyed said having enough money to last through retirement was a top concern, 21% of advisers said lack of consumer awareness was a major obstacle to retirement income planning. Interestingly, consumers continued to fund IRA rollovers in the last six months. Despite market conditions, 29% of IRA providers said rollover flows were much higher during the fourth quarter of 2008 and first quarter of 2009, and 57% of IRA providers said they saw steady rollover flows during the same period.

(c) 2009 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.