Kalamarides Seeks Risk Disclosure for Target-Date Funds
February 15, 2010
Fund managers should consider improving target-date fund disclosure to better align these products with the individual risk tolerance of investors, particularly in light of increased regulatory scrutiny over the performance of these funds in 2008, a retirement income expert says.
Jamie Kalamarides, senior vice president of retirement solutions at Prudential Retirement, recently spoke with Money Management Executive about improvements to the retirement income product lineup, annuity wrappers for 401(k) plans and multi-employer savings plans for small businesses.
MME: Is the current lineup of available retirement products meeting the needs of investors?
Kalamarides: Events of the past 18 months have clearly shown that we can create better outcomes for individuals. Our research found that six in 10 Americans are worried about retirement. I don't think the system is broken, but I think we can do a lot better with the tools we have in place and add some new tools as well.
There are three major issues that retirement plans need to address: coverage (making sure people have access to a plan), adequacy (making sure people are saving enough), and longevity (making sure they don't run the risk of outliving their assets).
MME: What are some winners and losers in the retirement income product space?
Kalamarides: I think it's obvious that target-date funds are here to stay. They are a great product-based solution to the question of "Where do I invest my money and make sure I'm diversified?" The challenge is that they don't address two major issues that investors have. The first is, "How do I make sure that I build up a seed amount of investments in the beginning, and feel comfortable about investing before I expose my savings the volatility of the market?" That requires a stable-value offering; one that has a guarantee of interest and principal.
The other thing that I think target-date funds need to address is how to prevent downside risk near retirement and then provide lifetime income. We're seeing an emergence of lifetime income products out there. I think these types of products-along with stable-value offerings-are going to have an increased prominence in investors' portfolios.
MME: How can target-date funds be improved?
Kalamarides: In target-date funds, investors are sometimes confused about whether or not a fund is managing to retirement or through retirement. We see the need to have better disclosure around target-date funds' asset allocation and what their time horizon is. Additionally, these funds don't always take into account risk tolerance. Some may be more aggressive, some may be more conservative and some may be moderate.
Prudential has a product called GoalMaker, which is an asset allocation tool that uses the underlying funds in a 401(k) plan to create a portfolio based on age, time horizon and risk tolerance. The reason why it uses those last two components is that it allows the person with those investments to automatically rebalance over time and become more conservative on a fully disclosed basis.
MME: Should the industry develop a naming convention for target-date funds that would give investors a better idea of their holdings?
Kalamarides: We shouldn't squelch the marketing aspects of target-date funds, but I think that we could address some of the confusion through better disclosure.
MME: How can fund companies help encourage more investors to take an active role in their own retirement planning?
Kalamarides: It's not just fund companies' responsibility to help investors take an active role in their retirement planning. Workplace-based providers like Prudential, employers, sponsors and financial advisers all share in that responsibility. Unfortunately, we know through behavioral finance research that most investors don't take an active role. The first thing we can do is help them avoid making mistakes, and we believe the best way to do that is to make it as simple as possible for participants.
Prudential introduced an approach called Redefining Retirement that we think is the best package for 401(k) plans. Specifically, it includes smart plan design, streamlined processing, automatic investments and guaranteed income, and lifelong education. By plan design, I mean automatically enrolled, automatically escalated investments into a diversified QDIA fund that turns into lifetime income. This program will solve the three major problems in the U.S. retirement system today: coverage, adequacy and longevity.
We think that we've got answers to all three of those issues, in terms of both delivery and the funds.
MME: How do you feel about putting a guaranteed income or annuity wrapper on target-date funds?