Historically, employees who
didn't have the experience to make informed investment decisions were
overwhelmed and intimidated by the prospect of manually diversifying and
rebalancing their accounts.
With today’s retirement plans,
you can provide your clients with access to asset allocation models,
target-date funds, and automatic rebalancing so that their employees can easily
manage their savings based on their personal risk preferences and goals.
Asset Allocation
Models
Asset allocation models are built with a mix of investments across different
asset classes. These models are created with specific investor profiles (e.g.,
conservative, moderate, aggressive, etc.) in mind to help align with particular
objectives and risk tolerance.When participants choose an asset allocation model that fits their personal savings goals, smart investing becomes quick and easy. Rather than selecting a number of individual investments, they can choose one of several portfolio models based on their age or risk tolerance.
In addition to reducing the number of choices that participants have to make, these models foster a disciplined approach to investing through built-in benefits such as proper diversification and rebalancing. Perhaps most importantly, they can help participants stay invested through extreme changes in the market. At Ascensus, we tracked plan participants who were invested in asset allocation models from the beginning of 2009 and through the end of 2011. In arguably one of the most volatile market periods ever, over 98% of those participants remained invested in asset allocation models.1
Target-Date Funds
Like asset allocation models, target-date funds allow employees to choose a single, diversified investment option. However, the asset mix is adjusted toward more conservative allocations based on a specified target date.
The ease with which a target-date strategy can be implemented makes it a popular choice in retirement plans. According to Morningstar’s 2013 Target-Date Series Research Paper, target-date funds saw almost $55 billion in net new flows in 2012, bringing their total to nearly $485 billion. In the first quarter of 2013, target-date assets crossed the $500 billion threshold after taking in an additional $23 billion in new assets.2
Automatic Rebalancing
One of the most attractive features of asset allocation models and target-date funds is automatic rebalancing, which mitigates the redistribution of employees’ assets due to an up or down market. This can help make sure that employees’ investment strategies stay appropriate for their current goals, risk tolerance, and circumstances. Target-date funds are rebalanced on a schedule determined by their portfolio managers, while the employer selects the frequency (quarterly, semi-annually, or annually) with which asset allocation models are automatically rebalanced.
Automatic rebalancing may also be offered to employees as a standalone option outside of target-date funds and asset allocation models. This allows them to automatically have their account balances redistributed at a schedule they choose according to their investment elections at the time of rebalancing.
Research has shown that the portfolio rebalancing system is an effective way to help ensure that employees stay on track with their retirement saving strategy. Forbes compared two portfolios each starting with a $10,000 investment beginning in 1985 and ending in 2010. Both portfolios began with a 60/40 mix of stocks and bonds; one was never rebalanced, while the other was rebalanced annually back to its original target. At the end of the 25-year period, the rebalanced portfolio ended with a higher balance ($97,000) than the un-rebalanced portfolio ($89,000).3
Concepts like diversification and rebalancing can be overwhelming for employees participating in your clients’ retirement plans. Providing access to asset allocation models, target-date funds, and automatic rebalancing allows your clients to simplify those concepts so they can help their employees move closer to achieving their retirement goals.
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