T. Rowe plans new conservative target date funds

May 22, 2013 @ 1:51 pm

By Jason Kephart

T. Rowe Price Group Inc. in August plans to launch a series of target date funds with a more conservative glide path than its existing such funds.

The new T. Rowe Price Target Retirement Funds will have about 42.5% of assets invested in equities at the target retirement date. Its existing target date funds, which have about $88 billion of assets, have 55% invested in equities at the target date.

The industry average, according to Morningstar Inc., is about 50%.

“We've seen some plan sponsors have the objective of having more-moderate volatility and principal certainty around retirement,” said Jerome Clark, one of the funds' portfolio managers.

To achieve that, the new target date series will start off with the same equity exposure as the existing funds, but by about 10 years from the retirement date, the allocation to equities will be about 15 percentage points less than the current funds, he said.

It definitely is a big change away from the way the existing funds are run, said Josh Charlson, a senior fund analyst at Morningstar.

“Their existing funds have one of the most aggressive glide paths in the industry,” he said. “They've defended it pretty robustly over the years, but the reality is, there are situations where they weren't able to get business — or even get their foot in the door — because there are plan sponsors who don't want to take on that kind of equity risk.”

The existing target date funds got hit harder than their peers in 2008, thanks to the higher equity exposure. The T. Rowe Price Retirement 2010 Fund (TRRAX), for example, lost 26% during the financial crisis, while the average target date fund lost 22%.

The equities helped, however, during 2009 when the 2010 rebounded 28%, compared with 22% for the average target date fund, according to Morningstar.

That volatility, though, may be one of the reasons that T. Rowe Price's target date fund market share has barely budged in the past six years.

Since 2007, it has managed about 16% of the assets in target date funds, according to Morningstar.

Mr. Clark said that the existing product still is the appropriate option for investors who are looking for lifetime income. The new funds are for investors who looking for a shorter withdrawal period.

“There are plan sponsors and participants who have very different objectives,” Mr. Clark said.

Other than the decreased equity exposure, the funds will be managed similarly to the existing funds.

“We're using the same components,” Mr. Clark said. “We're making the same decisions in the same manner.”

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