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Since they were introduced in 2002, the T. Rowe Price Retirement Funds have proven to be very popular with a wide variety of investors. These target-date funds invest in underlying T. Rowe Price funds according to an asset allocation model that reduces their exposure to equities over investors' lifetimes. Jerome Clark, the portfolio manager of the Retirement Funds, shares his insights on the retirement portfolios. |
A. Active management of the vast majority of the underlying T. Rowe Price funds. In managing these funds, the firm relies on bottom-up research of securities by its global research team. We believe this gives us the opportunity to enhance returns.
A. In picking funds, we're following the Retirement Funds' asset allocation model, not just relying on our best-known funds or portfolio managers. For example, in the large-cap value sector, we're using the broader Value Fund and not the larger Equity Income Fund. We think the broader mandate of the Value Fund better represents this sector because the Equity Income Fund aims to invest in a subset of value stocks, those paying higher dividends. Investors should feel comfortable that we're not trying to steer flows of assets to one fund or another. Instead, we're following a mandate: the most appropriate representative fund for each sector.
A. Our Retirement Funds are "through" funds focused on providing a rising income stream over a long retirement period. In an effort to achieve that, they have a higher equity allocation as investors move toward and into retirement. This capital appreciation potential is needed to combat inflation and sustain purchasing power for many years. A "to" fund is designed to get an investor to retirement, at which point they would reinvest their assets in another way, perhaps through an annuity. So these funds tend to have a lower equity allocation as they approach retirement because they are focused on principal protection. They just take investors to retirement and then leave them to develop their own strategies to contend with the long-term risks from inflation and longevity.
A. While we adhere to a long-term asset allocation strategy, we don't ignore what's going on in the short term. The firm has a very senior Asset Allocation Committee that decides whether to overweight or underweight certain asset classes and sectors based on a 6- to 18-month view of the market. Generally, these are modest tilts.
A. The Retirement Funds are invested across many different market sectors, and this diversification usually can help reduce the downside in bear markets. But 2008 was so extreme, given how far and how quickly markets fell, that it did not work as well. So there is this notion now that diversification is an erroneous concept forevermore. That is extrapolating from a short-term market—a perfect storm—to a long-term strategy. The true test of whether diversification works is over the long term. Of course, it can never assure a profit or protect against loss in a declining market.
A. There was a lot to be concerned about. But we did an analysis that found that our Retirement Fund investors during this time made fewer changes than direct investors in the underlying funds that compose the Retirement Funds. So we think that one of the benefits of target-date funds may be a possible change in investor behavior. These funds may help investors stay the course by providing them a well-diversified portfolio that may be less volatile than other individual funds in which they could have invested directly. If more-focused funds perform poorly in the short run, they may be tempted to flee those components of their portfolio. In 2000, for example, equity investors had negative returns, but fixed income investors enjoyed a significant rally that offset stock losses. An investor in a portfolio split 50/50 between stocks and bonds basically would have had a positive return overall and thus would have been less tempted to panic and move from stocks to bonds. It turns out that investor behavior may be positively influenced by the packaging of target-date funds—that is, by owning a wide range of asset classes and sectors in a single fund.
A. There has been a lot of attention focused on some investors who do not fully understand their investments in retirement funds, particularly the degree to which these funds involve market risks. We always try to disclose these risks as much as possible, but we believe there's room for improvement so we are heightening that element of our communications to Retirement Fund investors. T. Rowe Price also supports broader industry proposals to enhance disclosure and increase understanding of all retirement investments.
The principal value of the Retirement Funds is not guaranteed at any time, including at or after the target date, which is the approximate date when investors turn age 65. The funds invest in a broad range of underlying mutual funds that include stocks, bonds, and short-term investments and are subject to the risks of different areas of the market. The funds emphasize potential capital appreciation during the early phases of retirement asset accumulation, balance the need for appreciation with the need for income as retirement approaches, and focus more on income and principal stability during retirement. The funds maintain a substantial allocation to equities both prior to and after the target date, which can result in greater volatility.
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