AllianceBernstein Gives Target-Date Funds 20% Leeway to Manage Excessive Risk
To enable portfolio managers of its target-date funds to nimbly respond to extreme market volatility, starting in April, AllianceBernstein will allow these funds to move up to 20% of their assets from equities and real estate investment trusts into bonds and cash. AllianceBernstein is calling this a "volatility management component" and says it is in response to many of the criticisms levied at target-date funds following poor performance due to high equity exposure in 2008.
Unlike tactical asset allocation, which focuses on particular asset class returns in the short run, AllianceBernstein says, volatility management is centered on balancing risk and return. "We believe our new risk management tools will allow us to adjust portfolios during extreme market cycles such as the recent credit crunch, moderating short-term negative performance-but, importantly, without sacrificing long-term return potential," said Thomas J. Fontaine, head of defined contribution. AllianceBernstein will explain shifts in defense strategies to investors in its target-date funds, making the process completely transparent.
"This important enhancement is the result of a multi-year, firmwide research effort, which created new tools we believe can be applied to 'smooth the ride' and improve retirement outcomes for defined contribution plan participants," said Seth J. Masters, chief investment officer of blend strategies and defined contribution at AllianceBernstein. "The project demonstrates our ongoing work to deliver our best thinking on target-date design to plan sponsors and investors."
401(k)s Rose a Respectable 150% in Past Decade
Average 401(k) balances ended 2009 at $64,200, rising 28% for the year and 5.7% in the fourth quarter, according to the activity of Fidelity's 11 million participants in more than 19,000 defined contribution plans. The median one-year personal rate of return in 2009 was nearly 27% , on par with the S&P 500's 26% return. The contribution rate of 8.2% remained flat for the year, but in the fourth quarter, more people increased their deferral rates than decreased them, Fidelity said.
"The good news is that many workers, in spite of the economy, chose to save in their 401(k)s throughout 2009, and as the markets recovered, so did many Americans' account balances," said Jim MacDonald, president of workplace investing at Fidelity.
For those who continued to invest in their 401(k) for the past 10 years, their account balances increased an impressive 150% to $163,900 from $65,800. These investors had a median age of 51 years and a deferral rate of 10.4%.
Fidelity also found that 66% of participants who took a higher risk with their asset allocations over the past decade compared to an appropriate age-based target-date fund, experienced lower returns.
Fidelity also learned that investors are moving away from higher equity exposure to more balanced portfolios; in 2000, participants directed 80% or more of their new contribution dollars into equities, but by 2009, that fell to 70%. In line with this, the percentage of people directing 100% of their contributions to equities fell from 47% to 19%.
With $26B in Flows in 2008, JPMorgan Third Best-Seller
JPMorgan's five-year plan to boost its mutual fund business appears to be paying off, with the company attracting $26 billion in 2008, making it the third best-selling fund family for the year, excluding money market funds, behind Vanguard and PIMCO. In 2004, investors redeemed $1.6 billion from JPMorgan funds. Still, however, with $91 billion in assets under management, however, JPMorgan is now the 14th-largest fund company in the nation.
JPMorgan Funds CEO George Gatch explained that managing money is "incredibly important" for its private banking clients. "Five years ago, my goal was to be among the top five in net fund flows," Gatch said. "No one believed me, internally and externally."
Gatch said he achieved the strong inflows through small meetings with financial advisers in which JPMorgan sales executives walked them through the strengths of their products, research and performance. In addition, JPMorgan began hiring top-level salespeople in July, expanding ranks by 30%, all the while doubling advertising expenditures.
Absolute-Return Funds Set For 25% Market Share, Putnam Chief Exec Says
Putnam Investments is betting that actively managed products like its absolute-return funds will resonate more with skittish investors than index funds and exchange-traded products, which might be cheaper but mirror the market's volatility. "Creating and preserving wealth is an active effort," said Robert L. Reynolds, president and CEO of Putnam Investments. "Active management has to be part of everyone's strategy going forward."
Despite the market's rocky performance over the past decade, investment advisors have continued to press the "buy and hold" and "time in the market, not timing the market" adages on investors. Disillusioned investors may now be more willing to consider different strategies, such as absolute-return products.
Putnam's suite of absolute-return funds seek to mimic average market returns, without exposing investors to the market's volatility. By using fundamental research methods and stretching performance over a three-year average, Putnam's portfolio managers try to trim the volatility off markets and give investors a steady outcome.
Reynolds said funds that aim to provide absolute-returns currently account for about 5% of the mutual fund space, but that's not enough: "In the next few years, we would like them to be 25% of the mutual fund space. They're that important."
Obama Administration Pinpoints Fixed Annuities
After news that the Obama administration is promoting the use of fixed annuities to help middle-class savers in defined contribution plans manage longevity risk, research and advisory firm Aite Group took a look at what this will mean for insurers.
While the government promotion does not necessarily mean mandating that annuities be used, it does impact insurers' DC plan design, sales and asset retention. Insurers with large books of DC business, Aite Group says, are best positioned to quickly integrate and implement a program of automatic-or "test-drive"-annuities to meet a possible uptick in interest.
The firm says ING, John Hancock, New York Life, MetLife and Principal Financial have strong existing networks of internal annuities wholesalers and service infrastructures, and could roll out and support such fixed annuity solutions.
Insurers with internally developed DC platforms, as opposed to those licensed from external software providers, may have an additional advantage, Aite Group says.
Congress May Restore IRA Contributions to Charity
A provision that expired last year that permits people age 70-1/2 to up to $100,000 a year from their IRA to charities without incurring taxes, could be reinstated. There is a good chance that the government will restore the provision, which permits the contributions without incurring any tax consequences, yet counting toward the required minimum distribution. Late last year, the House approved legislation that would extend it through the end of 2010, and a number of Senators appear to be in favor of it. In addition, tax accounting experts note that charities are strong lobbyists on the Hill.
RR Donnelley Releases Prospectus iPhone App
RR Donnelley has added another mobile application to its suite for mutual fund and annuity companies, broker/dealers and financial advisers, the iCOMPLi iPhone app that makes it possible to send a SEC-compliant prospectus, summary prospectus or statement of additional information to an investor.
The application enables senders to track the delivery and receipt of printed and e-mail versions of investor communications, and maintain the information for audits.
"Financial services, mutual fund and variable annuity companies will benefit from the significant cost savings the platform provides, as well as reduce the risk of potential miscommunication with investors," said Tom Juhase, president of financial services at RR Donnelley. "We believe the Right Prospectus document repository and its mobile applications, such as iCOMPLi, represent a unique investor communications workflow solution."
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