John Hancock to offer 'to' and 'through' target-date funds

401(k) plan participants will pick own TDF strategy: 'to' or 'through' retirement

Aug 29, 2010 @ 12:01 am

By Darla Mercado

In a bid to grab a bigger slice of the highly competitive retirement plan market, John Hancock last week became the first provider to offer 401(k) participants a choice between target date funds that are constructed to take investors “to retirement” or “through retirement.”

Until now, fund firms have provided plan sponsors with either a lineup of target dates funds that go “to retirement,” which maintain a conservative allocation and are set up to be liquidated when the investor stops working, or a series of “through retirement” funds, which are managed as far as 25 years beyond retirement and have a higher equity allocation.

“This is the direction a lot of proprietary providers will take as opposed to choosing "to retirement' or "through retirement' — they don't want to pick the wrong glide path, so they'll offer both,” said Mark Wayne, president and chief executive of Freedom One Financial Group, a 401(k) plan consultant that oversees $1 billion in assets.

John Hancock last week added a new series of “to retirement” funds, called “Retirement Living,” to its already established “Retirement Choices” series of “through retirement” funds.

The new suite of funds uses index funds and are designed to reach their lowest allocation to equities at the investor's retirement date, with about 90% of the funds in fixed income and 10% in stocks. In contrast, the allocation at retirement in the “through retirement” series is 48% fixed income and 52% equities.

Forty years out from retirement, the allocation of the “to retirement” fund is 18% fixed income and 82% in equities, compared with a 5%/95% mix for its “through retirement” counterpart.

“We have participants with different needs, so we introduced a choice with a purpose,” said Ed Eng, senior vice president for product development at John Hancock USA Retirement Plan Services. “This is a point of differentiation for us, the only 401(k) provider that gives you a choice in the package.”

While offering such a choice may well be the way of the future, several competitors and advisers contacted by InvestmentNews criticized the strategy.

For starters, they argue that such a decision will be too confusing for most plan participants and should be left to the plan sponsor and adviser.

“Adding more choices doesn't solve anything; it compounds the problem and confusion is rampant at the plan sponsor and participant levels,” said Ed Lynch, managing director and chief executive of Dietz and Lynch Capital.

Alan Gilston, a life cycle funds portfolio manager at OppenheimerFunds Inc., agreed. “Investors don't know with 100% foresight what they'll do,” he said. “As you approach retirement, you may have a clearer view, but 40 years out, it's hard to have insight into what will actually happen.”

Indeed, the duty of selecting investments should not belong to participants, said Seth J. Masters, chief investment officer of blend strategies and defined contribution at AllianceBernstein Investments. “The whole point is to basically embody the plan sponsor's best advice on how the participants' money should look as they move through their life cycle, given the demographics and other factors.”

“With a rare exception, there's no rhyme or reason to the choices people make,” he added.

Critics of John Hancock's new strategy also claim the “to retirement” series is far too conservative and may leave many 401(k) participants without adequate savings in their later years. After all, they say, many skittish investors would likely now pick a conservative approach when they should be thinking longer term.

“The typical participant assesses their risk appetite based on what they heard on the radio that morning,” said Joseph R. Birkofer, a principal with Legacy Asset Management Inc. “It lends itself to allowing investors to fulfill their worst behaviors.”

Mr. Eng countered that educational materials would help make the choices clear for participants making a selection during a company enrollment period.

He also noted that the company believes the glide path is consistent with the fund suite's intent. Mr. Eng also said that the enrollment materials were crafted to help participants choose the right fund based on long term needs rather than short-term performance, but employees can opt to work with the plan's adviser to help them make the selection.

The new suite of “to retirement” funds carry expenses of just under 80 basis points, which is 20 to 25 basis points cheaper than their “through retirement” counterparts.

Still, they are much more expensive than index-based target date funds from Wells Fargo Asset Management (50 basis points) and The Vanguard Group Inc. (19 basis points).

The higher fees are based on the extra costs of selling to small to midsize retirement plans, Mr. Eng said.

E-mail Darla Mercado at


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