Defined Contribution Insights
In this Video from the Asset TV Masterclass, American Funds portfolio manager Jody Jonsson explains why it is important for a target date fund to be designed to build and protect wealth through retirement.
I think people are very focused on needing to both build and protect wealth. I think maybe 10, 20 years ago we could just talk about “buy and hold” and you could put it away and forget about it. And the events of the last decade have made people very, very sensitive to downside risk. We certainly see in our investor base that lots of people arrive at retirement and they’re really not ready to retire. They need to continue to build that wealth well into retirement. And that’s partly why we designed our glide path the way we have with a higher representation of equities and, in particular, dividend-paying equities into and through retirement. I think people are extremely sensitive to the sequence of returns. And as we’ve seen, once you’re in the distribution phase of a retirement plan, and you’re taking money out on a regular basis, you care a lot more about protecting your downside and having lower volatility. And, again, I think that was sort of academic for a lot of people until the financial crisis, and now it’s very, very real, and people had to start taking things out of pension plans in 2008. So it’s certainly sensitized us in how we think about our glide path and how we manage all of our funds that are the underlying building blocks of our plans.
Well, Jody, I’m hearing two forces and I’m curious how you think about it. On one hand, there’s this increased uncertainty that are making many investors afraid and not participating, maybe, to some extent. On the other side, obviously if you’re living longer you may want to be more aggressive. Do you find that you’ve adjusted the slope of your glide path at all to respond to these two, sort of what would appear to be, opposing factors?
We have not changed the scope of our glide path to be more aggressive in the outer years. We still think it’s important to be protecting wealth as well as building it in that period. So we have changed the shape of our glide path to favor dividend-producing equities, more equity income, and more flexibility to shift between equities and bonds as the environment dictates. We have a lot of growth-oriented equities in the early years of our vintages, and we feel like that’s the period where people can tolerate the ups and downs and can really build the wealth. But then we want to keep shifting it so that while we’re building, we’re also protecting on the downside, the further people get past retirement date.
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Although the target date funds are managed for investors on a projected retirement date time frame, the funds' allocation strategy does not guarantee that investors' retirement goals will be met. The target date is the year in which an investor is assumed to retire and begin taking withdrawals. American Funds investment professionals manage the target date fund's portfolio, moving it from a more growth-oriented strategy to a more income-oriented focus as the fund gets closer to its target date. Investment professionals continue to manage each fund for 30 years after it reaches its target date.
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