Defined Contribution Insights
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DEFINED CONTRIBUTION INSIGHTS | February 2017
Defined contribution (DC) plans, originally designed as supplemental savings vehicles, typically focus only on the savings phase — not the needs of retirees. Part of the reason for the historic success of the traditional defined benefit (DB) plan is that it is structured to provide participants retirement income directly from the plan.
DEFINED CONTRIBUTION INSIGHTS | November 2016
Defined benefit (DB) plans consistently report better returns — as much as 0.9% higher per year1 — than defined contribution (DC) plans. The Pension Protection Act gave plan sponsors tools to narrow this gap, such as investment re-enrollment and target date funds (TDFs) as default investments. These have helped improve investing behavior for many participants, but what about the 63% of DC plan participants who still make their own investment decisions?2
DEFINED CONTRIBUTION INSIGHTS | October 2016
The Rise of Foreign Markets More than half of global market capitalization is non-U.S.
Home bias (a significant over investment in one’s home country) has been a long-entrenched pattern in self-directed defined contribution (DC) plans. A decade of efforts by plan sponsors in the U.S., including the addition of international funds to retirement plan menus, has failed to successfully spur participants to increase their exposure to non-U.S. assets; the result is that participants are missing out on potentially attractive investment opportunities abroad, including in emerging markets. At the same time, plan sponsors are grappling with the phenomenon of choice overload, as more than a decade of behavioral finance research has shown that the expansion of menu options has proved overwhelming for participants, creating confusion and inertia.
DEFINED CONTRIBUTION INSIGHTS | September 2016
DEFINED CONTRIBUTION INSIGHTS | August 2016
DEFINED CONTRIBUTION INSIGHTS | August 2016
Equity Glide Path Moves to Emphasis on Income From Emphasis on Growth as Participants Age
We believe that target date series should feature not only a gradual reduction in equities over time, but also a gradual shift in the nature of that equity exposure. This transition, which we call recharacterizing the equity exposure, effectively creates a “glide path within a glide path” that can help lower volatility.
American Funds portfolio manager Brad Vogt explains the importance of the right target date series to help investors pursue their retirement goals. Beyond the glide path, a good evaluation process should include an examination of the underlying funds and the purpose each serves over the long term.
DEFINED CONTRIBUTION INSIGHTS | June 2016
Intermediaries have a new way to differentiate themselves and increase the value they deliver to their clients. The new American Funds Target Date ProView℠ tool provides a fast, powerful online platform to analyze and compare target date fund series to help make an appropriate selection for a DC plan’s participants.
DEFINED CONTRIBUTION INSIGHTS | March 2016
Exhibit 3: American Funds (R-3) vs. relevant index
While sponsors should compare their plan’s investments at least once a year with the appropriate benchmarks and peer investments and over a series of different time horizons, the key question remains: How long should those time horizons be to ensure that the resulting decisions are prudent?
DEFINED CONTRIBUTION INSIGHTS | January 2016
Given the rapid acceptance of target date funds (TDFs) as the primary retirement investment strategy for American workers, the choice of target date provider is now among the most important decisions for an investment committee.
The beauty of a TDF is its simplicity for participants. However, its underlying complexity can challenge committees tasked with assessing a TDF’s glide path design, risk/return profile and fee structure as part of fiduciary due diligence.
One of the considerations is whether the TDF should be actively or passively managed. In either case, appropriate due diligence must be conducted. When selecting a TDF provider, sponsors should remember:
DEFINED CONTRIBUTION INSIGHTS | June 2015
Plan fiduciaries devote significant time and resources to educating participants about the importance of saving for retirement.
Despite this effort and the care that goes into making a well-balanced menu of investment options available to all participants, many participant allocations are at odds with their retirement needs.
DEFINED CONTRIBUTION INSIGHTS | March 2015
Wesley Phoa, portfolio manager, target date and fixed-Income funds, 21 years of experience.
Jason Bortz, ERISA attorney, 17 years of experience.
Toni Brown, CFA senior defined contribution specialist, 25 years of experience.
John Doyle, senior defined contribution specialist, 28 years of experience.
Rich Lang, investment specialist, 21 years of experience.
Target date funds have enormous potential to make defined contribution plans more effective and straightforward for participants. But to capture the funds’ benefits — and to help meet fiduciary obligations — plan sponsors must implement thorough, well-documented evaluation procedures.
DEFINED CONTRIBUTION INSIGHTS | September 2014
In these videos, portfolio managers Jim Lovelace, Wesley Phoa and Brad Vogt discuss the American Funds Target Date Retirement Series.
DEFINED CONTRIBUTION INSIGHTS | August 2014
American Funds Target Date Retirement Series Glide Path
All target date series feature glide paths that reduce equities and simultaneously increase fixed income over time. American Funds Target Date Retirement Series® is distinguished by also featuring shifts in the nature of both the equity and the fixed-income exposure.
DEFINED CONTRIBUTION INSIGHTS | May 2013
Emerging Markets: Key Driver of Global Growth
In today’s generally low-growth environment, we believe it is important that participants in defined contribution (DC) plans have access to what could be a meaningful source of return: emerging markets. In the 10 years through 2011, emerging markets’ GDP grew at an average annual rate of 6.5%, compared to just 1.6% for advanced economies. Although risks still exist, several factors make emerging markets attractive today for many DC plans. These include the countries’ favorable demographics and rising incomes, as well as their strong fiscal balances and current account surpluses. These trends have led to an improvement in credit quality. Emerging markets strategies are now commonly used in defined benefit plans. Isn’t it time for DC participants to have access to these opportunities? We believe that plan sponsors should consider including emerging markets in DC lineups as a standalone menu option or component of a custom target date fund. At Capital, we encourage sponsors to think broadly about emerging markets exposure, focusing not just on pure equity and debt strategies but also on strategies that combine both asset classes or that include a mix of developed- and developing-market companies that do substantial business in emerging markets.
DEFINED CONTRIBUTION INSIGHTS | October 2012
More plan sponsors are asking third parties — including you, as their plan’s financial advisor — for assistance when it comes to selecting and monitoring retirement plan investment menus. Whether you decide to be or not to be a fiduciary probably depends on several factors, not least of which is: Are you able or willing to serve as a fiduciary?
Assuming you’re able to serve as a fiduciary, you may wish to ask yourself if this is a service that:
If the answer to any of these questions is no, it may make more sense to operate as a nonfiduciary and align with a third party to provide fiduciary investment selection and monitoring services. And since many advisors are turning in this direction, our industry has seen the rise of third-party fiduciaries willing to take on this role.
DEFINED CONTRIBUTION INSIGHTS | October 2012
Both recent and anticipated retirement plan regulations have heightened plan sponsors’ concerns about their fiduciary responsibilities. Among their concerns is selecting and monitoring plan investment lineups.
As a plan fiduciary, you’re required by the Employee Retirement Income Security Act (ERISA) to act in the best interests of participants in your plan. This includes ensuring that your plan offers a lineup of investments from which participants have the potential to create a well-diversified portfolio, to help minimize the risk of larger losses.
Faced with these responsibilities and related potential liability, many plan sponsors are turning to third parties — financial professionals or independent third-party fiduciaries — for help with selecting and monitoring plan investments.
DEFINED CONTRIBUTION INSIGHTS | March 2012
Aggregate Asset Mix of the Top 1,000 DC Plans as of September 30, 2011
Most defined contribution participants have minimal exposure to investments outside the U.S. and are not exposed to the long-term growth potential of some of the world’s most dynamic companies and industries. Just as defined benefit (DB) plans did in the 1990s, defined contribution (DC) plans should consider moving away from a largely U.S.-centric investment view to pursue potentially better absolute and risk-adjusted returns. Plan sponsors can encourage this by providing a balanced menu of investment choices that include international, global and even emerging markets equity options in their DC lineups.
View fund expense ratios and returns.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
This material is intended for use by financial professionals or in conjunction with the advice of a financial professional.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional 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.
Bond ratings, which typically range from AAA/Aaa (highest) to D (lowest), are assigned by credit rating agencies such as Standard & Poor's, Moody's and/or Fitch, as an indication of an issuer's creditworthiness.
Fund shares of U.S. Government Securities Fund are not guaranteed by the U.S. government.
There may have been periods when the fund has lagged the index or indexes. Certain market indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index.
Investment results assume all distributions are reinvested and reflect applicable fees and expenses.
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 not to be comprehensive or to provide advice. Investors should consult their tax or legal advisors.
Expense ratios are as of each fund's prospectus.
The American Funds are distributed by American Funds Distributors, Inc.
The Capital Group companies manage equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.
Allocation percentages and underlying funds are subject to the Portfolio Oversight Committee's discretion and will evolve over time. Underlying funds may be added or removed at any time.
Past results are not predictive of results in future periods.