Defined Contribution Insights
Discussions about a target date series often center on the glide path. Less attention has been paid to the underlying equity and bond funds used within the glide path. In this video, Alan Berro — who helps oversee American Funds Target Date Retirement Series® — explains why the results of those underlying funds can dramatically affect investor outcomes.
Alan Berro, who helps oversee American Funds Target Date Retirement Series, discusses the importance of quality underlying funds in a target date series. The underlying investment strategies can dramatically affect outcomes for investors.
Why are underlying funds so important?
Alan Berro: We believe it's important to pay attention to the underlying funds. Although we agree that asset allocation is an important component of the target glide path, we also believe that having the right funds at the right time in the glide path is extremely important. Our glide path uses a range of funds in different parts of the glide path for different purposes. So we have some funds that are designed to help capture as much upside as possible in up markets, and we have some funds that seek to protect in down markets by having lower volatility and higher income components. Having the right mix of funds at different points along the glide path really helps participants' returns over long periods of time.
How do global and multi-asset underlying funds help the series?
Alan Berro: Having global and multi-asset funds is really a key component to the series. Instead of relying on one person to make the asset allocation decisions, by having flexible funds that can shift between non-U.S. equities and U.S. equities — can shift between equities and fixed income securities, can shift between growth stocks and value stocks — really helps push the decision-making down to the underlying fund managers. So there’ve been periods where we found the U.S. markets and equities to be more attractive, and the underlying portfolio managers have shifted there and that's been helpful to returns. Similarly, if the portfolio managers viewed non-U.S. markets or fixed income markets as more attractive, we have funds that have the flexibility to shift that way without having to rely on one person or even the Portfolio Oversight Committee to make that shift.
How are bonds used in the glide path?
Alan Berro: We see four important reasons to have bonds in the glide path. First is inflation protection; the second is capital preservation; the third is income; and the fourth is that they have a low correlation to equities. We always like to have some bonds even early in the glide path for capital preservation. Should we get into a poor equity market, we could reinvest that capital into equities at a later date. Bonds also help over the entire glide path in terms of producing income. That becomes more important as we get closer and through retirement. We shift to a higher quality bond portfolio, we shift to bonds that probably have a lower correlation with equities, and we shift to bonds that often can help produce a stable earnings stream in retirement.
What’s the series’ approach to retirement income?
Alan Berro: The series seeks to provide sustainable income in retirement by shifting to our more conservative equity-income funds — funds such as Capital Income Builder®, The Income Fund of America® — that focus on higher yielding equities that can produce a steady income stream throughout your retirement. Both of those funds focus on dividend payers, which we have found over time can be a good source of income and a good source of downside protection in poor markets. The Portfolio Oversight Committee has had a philosophy that investors in the target date need equities not only during their accumulation phase but also during their distribution phase, and that they provide not only income but also a good hedge against inflation through retirement. And so it's important to have these types of funds and we, because we shift to more conservative equity funds, we are able to have a higher equity component through retirement and provide these features.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the collective investment trust's Characteristics statement, which can be obtained from a financial professional, Capital or your relationship manager, and should be read carefully before investing.
Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries. Small-company stocks entail additional risks, and they can fluctuate in price more than larger company stocks.
The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings. Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds. Investments in mortgage-related securities involve additional risks, such as prepayment risk, as more fully described in the prospectus. While not directly correlated to changes in interest rates, the values of inflation-linked bonds generally fluctuate in response to changes in real interest rates and may experience greater losses than other debt securities with similar durations.
Each target date fund is composed of a mix of the American Funds and is subject to the risks and returns of the underlying funds. Underlying funds may be added or removed during the year. 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.
Content contained herein is not intended to serve as impartial investment or fiduciary advice. The content has been developed by Capital Group, which receives fees for managing, distributing and/or servicing its investments.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.