ppt download powerpoint presentation
TRANSCRIPT
Lifecycle Funds-Right on Target
Advantage 2005
John Sturiale CFP® AIF ®, Director Retirement Investment Services
The material contained herein is proprietary to Schwab and for informational purposes only. None of the information constitutes a recommendation by Schwab or a solicitation of an offer to buy or sell any securities. The information is not intended to provide tax, legal or investment advice. Schwab does not guarantee the suitability or potential value of any particular investment or information source. Certain information presented herein may be subject to change. Neither the presentation, nor any information or material contained in it may be copied, assigned, transferred, disclosed or utilized without the express written approval of Schwab.
© 2005 Schwab Retirement Plan Services, Inc. All rights reserved. (0805-8963).
2 © 2005 Schwab Retirement Plan Services, Inc. All rights reserved. (0805-8963).
Our Mission
Why are we here today?
- To help participants get to and through retirement
- To educate on the latest industry trend, Target Retirement Funds
Retirement made easy - Target Retirement Funds
- One Simple, Informed Decision
3 © 2005 Schwab Retirement Plan Services, Inc. All rights reserved. (0805-8963).
Target Retirement Funds
Lifecycle/Target Retirement
•Lifecycle, Age-Based
•Adjust with a specific Target Date in mind. Usually year-dated funds:
*2010 * 2020
*2030 *2040
•Become more conservative as retirement date approaches
•Participant takes a “hands-off” approach, portfolio automatically rebalanced by Professional Money Managers
Lifestyle
•Lifestyle, Risk-Based
•Tailored to a particular age and risk tolerance
Usually range in risk tolerance:
*Conservative
*Moderate
*Aggressive
•Over time the participant must monitor and change funds as retirement date grows closer
Balanced/Asset Allocation
•Balanced Fund
•Not managed to a certain date or risk tolerance
•Maintain “static” allocations among stocks and bonds (Typically 60% Stocks, 40% Bonds)
•Asset Allocation Managers are more flexible with allocation ranges than Balanced Managers
There are 3 Types of Funds:
4 © 2005 Schwab Retirement Plan Services, Inc. All rights reserved. (0805-8963).
Industry Statistics
57.9 63.3 69.2 68.2
101.4
139.7
020
40
6080
100
120140
1999 2000 2001 2002 2003 2004
Billons of Dollars in Total LifeCycle Funds Source: Lipper Research Series - LifeCycle Funds: Fit for Life, March 2005
Usage and Growth in the Industry
15
25
43
0
10
20
30
40
50
2002 2003 2004
Billons of Dollars in Target Retirement Funds Source: Financial Research Corp.
LifeStyle and LifeCycle Funds (1999 – 2004)
Target Retirement Funds (2002 – 2004)
63% of U.S. plan sponsors now offer these types of vehicles [lifecycle funds], up from 25% in 20011
1 Mercer Investment Consulting Survey, April 2004
5 © 2005 Schwab Retirement Plan Services, Inc. All rights reserved. (0805-8963).
Industry Statistics
Lifecycle Fund Investors’ Avg. Annual Return: + 3.06%1
Non-Lifecycle Fund Investors’ Avg. Annual Return: - 0.35%1
Returns for professionally managed pension funds beat self-directed 401(k) plans by 4.3% in 2000; 3.5% in 2001; and 3.8% in 20022
21% of respondents said they were much more likely to participate in an employer-provided plan, like a 401(k), if it provided a life-cycle fund3
23% of employees participating in their employer-sponsored plan said they were “very likely” to use a life-cycle fund3
63% of US plan sponsors now offer these types of vehicles [life-cycle funds], up from 25% in 20004
Lifecycle Fund Investors’ Avg. Annual Return: + 3.06%1
Non-Lifecycle Fund Investors’ Avg. Annual Return: - 0.35%1
Returns for professionally managed pension funds beat self-directed 401(k) plans by 4.3% in 2000; 3.5% in 2001; and 3.8% in 20022
21% of respondents said they were much more likely to participate in an employer-provided plan, like a 401(k), if it provided a life-cycle fund3
23% of employees participating in their employer-sponsored plan said they were “very likely” to use a life-cycle fund3
63% of US plan sponsors now offer these types of vehicles [life-cycle funds], up from 25% in 20004
Additional Industry Statistics
1Burgess & Associates, 1993-2003 Study of 90K DC Plan Participants2Watson Wyatt World Study, 20023Employee Benefits Research Institute (EBRI) and Matthew Greenwald & Associates4Mercer Investment Consulting Survey, April 2004 – 434 responses
6 © 2005 Schwab Retirement Plan Services, Inc. All rights reserved. (0805-8963).
One, Simple Solution
Problem . . . ? Solution!Misguided Asset
Allocation- Approximately 50% of participants have equity allocations of either 0% or more than 90%1
Refined Asset Allocation-Better risk/return performance-Automatic allocation adjustment-Fully invested
Insufficient Diversification- More than 33% of portfolios were concentrated in just one or two asset classes2
Multi-Level Diversification-“Best-in-class” investment managers-Low overlap/correlation of holdings
Rebalance Inertia- 60% of participants never rebalance after making an initial enrollment3
Intelligent Rebalancing-Maximizes turnover efficiency -Controls Risks
1 Employee Benefit Research Institute Issue Brief 2722 Hewitt Associates 20033 Profit Sharing Council of America
7 © 2005 Schwab Retirement Plan Services, Inc. All rights reserved. (0805-8963).
Evaluating Target Retirement Funds
What should you look for when evaluating Target Retirement Funds?
Active vs. Passive Management
Glide Path of Funds
Style of Investing
Underlying Management (Proprietary vs. Non-Proprietary)
Benchmark Analysis
8 © 2005 Schwab Retirement Plan Services, Inc. All rights reserved. (0805-8963).
Target Retirement Funds
Participant will pick one fund depending on their desired target retirement
year: 2010, 2020, 2030, or 2040.
As the target date As the target date approaches, the fund approaches, the fund
automatically becomes automatically becomes increasingly more increasingly more
conservative to help conservative to help reduce portfolio riskreduce portfolio risk.
9 © 2005 Schwab Retirement Plan Services, Inc. All rights reserved. (0805-8963).
Glide Path
•Allocation at retirement is 75% Bonds/Stable Value & Cash and 25% Stocks.
•This remains static through retirement in the Retirement Income Fund
Automatic Asset Allocation Adjustment
10 © 2005 Schwab Retirement Plan Services, Inc. All rights reserved. (0805-8963).
Asset Allocation
Diversification Across Asset Classes
11 © 2005 Schwab Retirement Plan Services, Inc. All rights reserved. (0805-8963).
Underlying Investment Management
Multi-Manager ApproachProprietary Manager Approach
Large Cap Value Best in Class Value Mgr Proprietary Manager A
Large Cap Growth Best in Class Growth Mgr Proprietary Manager B
Domestic Small Best in Class Small Cap Mgr
Proprietary Manager C
International Core
Best in Class International Mgr
Proprietary Manager D
International Small
Best in Class International Mgr
Proprietary Manager E
Core Bond Best in Class Bond Mgr Proprietary Manager F
Stable Value Best in Class Stable Value Mgr
Proprietary Manager G
Management Approach: Multi Manager vs. Proprietary Manager
12 © 2005 Schwab Retirement Plan Services, Inc. All rights reserved. (0805-8963).
Underlying Investment Management
Schwab Managed Retirement Schwab Managed Retirement Trust FundsTrust Funds
Mutual Fund AMutual Fund A Mutual Fund BMutual Fund B
Management Approach: Multi Manager vs. Proprietary Manager
According to Overlap®, a percentage of 20% or more
indicates significant overlap of equity holdings. (Shown in red)
13 © 2005 Schwab Retirement Plan Services, Inc. All rights reserved. (0805-8963).
Benchmark Analysis
Example: Target Retirement 2020 Fund 1 Year Return
2020 Fund 12.00%2020 Benchmark* 11.00%
Benchmarks are a composition of the underlying category indices:
Sample Asset Allocation Sample Benchmark Composition:
Domestic Equity 54.00% Russell 3000 54.00%Int’l Equity 13.00% MSCI EAFE
13.00%Fixed Income 31.00% LB US Agg. Bond 31.00%Cash 2.00% 3 Month T-Bill 2.00%
Example: Target Retirement 2020 Fund 1 Year Return
2020 Fund 12.00%2020 Benchmark* 11.00%
Benchmarks are a composition of the underlying category indices:
Sample Asset Allocation Sample Benchmark Composition:
Domestic Equity 54.00% Russell 3000 54.00%Int’l Equity 13.00% MSCI EAFE
13.00%Fixed Income 31.00% LB US Agg. Bond 31.00%Cash 2.00% 3 Month T-Bill 2.00%
These values are for illustrative purposes only and do not reflect the performance of any particular investment security.
Benchmarks created should measure the performance of each manager and the portfolio as a whole.
14 © 2005 Schwab Retirement Plan Services, Inc. All rights reserved. (0805-8963).
Comparison
Fund Structure Active vs. Passive Management Proprietary vs. Non-Proprietary Management Mutual Funds vs. Collective Trust Funds 10-Year Increments vs. 5-Year Increments
Oversight Some products have a 3rd Party Oversight
Product vs. Process Best-in-Class vs. Proprietary Managed Products
Asset Allocation Some Products are More Aggressive
(i.e. 2010 Funds: Manager A has 67% Equity, while Manager B has 45% Equity)
Some manage to a Target Date, Others Manage Past Target Dates
15 © 2005 Schwab Retirement Plan Services, Inc. All rights reserved. (0805-8963).
Ideal Structure
Summary of Main Characteristics to Consider When Choosing a Target Retirement Fund:
Investment Diversification within the Portfolio
Investment Manager Due Diligence & Oversight
Investment Management- Non-Proprietary vs Proprietary
Competitive Performance and Reasonable Fees
16 © 2005 Schwab Retirement Plan Services, Inc. All rights reserved. (0805-8963).
The Future
What can you expect to see in years to come?
More Variations
More Multi-Manager Approaches
Further Popularity within the Industry
Further Default Options by Age
Reduction in Balanced Fund Options in Plans
Reduction in Number of Total Options in Plans
17 © 2005 Schwab Retirement Plan Services, Inc. All rights reserved. (0805-8963).
Q&A
Thank You
18 © 2005 Schwab Retirement Plan Services, Inc. All rights reserved. (0805-8963).
Disclosure
Schwab Corporate Services (SCS) provides services to retirement plan sponsors and participants through Schwab Retirement Plan Services, Inc, The Charles Schwab Trust Company, and Charles Schwab & Co., Inc. SCS also provides equity compensation plan services and other financial and retirement services to corporations and executives. Schwab Retirement Plan Services, Inc. provides recordkeeping and related services with respect to retirement plans. CSTC, a California state-chartered trust company, provides trust and custody services to retirement plan sponsors. Charles Schwab & Co., Inc. (Member SIPC) is a registered broker/dealer, offering the Schwab Personal Choice Retirement Account® (PCRA), as well as other brokerage and custody services to its customers. These entities are affiliates of each other and are wholly owned subsidiaries of The Charles Schwab Corporation.
The Schwab Managed Retirement Trust Funds are collective trust funds. They are not mutual funds and their units are not registered with the SEC or regulatory authorities in any state or other jurisdiction. The funds are not guaranteed by The Charles Schwab Trust Company, any of its affiliates, the FDIC or any other person. The unit value of the funds will fluctuate and investors may lose money. Various asset classes of the underlying funds, such as small-cap and international may carry additional risks.