Alternatives in target-date funds can increase retirement income, lower risk: report

Georgetown report also notes diversification of TDFs requires education for participants and oversight by plan sponsors.

The strategic use of alternatives in target-date funds can increase retirement income while lowering risk, said a report from the Georgetown University Center for Retirement Initiatives.

The report, “The Evolution of Target Date Funds: Using Alternatives to Improve Retirement Plan Incomes,” said the underlying asset classes in target-date funds can include private equity, real estate and hedge funds to create what the report calls a “diversified TDF.” These diversified funds could provide better returns than those based on equity and fixed-income assets, the report said.

“Our analysis showed that a diversified TDF could increase the amount of an annual retirement income that can be generated by converting a participant’s defined contribution balance into a stream of income at retirement by between 11% and 17% depending on market conditions,” said Angela Antonelli, the center’s executive director, in a news release announcing the report.

Diversified target-date funds are more likely to maintain positive retirement assets after 30 years of retirement spending, the report said. They also offer higher expected returns than traditional target-date funds and have lower downside risk at both the time of retirement and 10 years after retirement.

“This mitigates the negative impact of a short-term market shock for those participants at or near retirement,” the report said.

The report noted that increasing diversification in target-date funds requires education for participants and plan sponsors, and oversight by plan sponsors. Adding alternatives to target-date funds brings up such issues as liquidity, pricing, benchmarking, fees and governance. However, given the national savings crisis the U.S. is currently undergoing, there is a sense of urgency in coming up with high-returning retirement offerings, the report said.

The report, written in conjunction with Willis Towers Watson, is on the Georgetown University CRI’s website.

James Comtois is a reporter at InvestmentNews’ sister publication Pensions & Investments.