Download T. Rowe Price Target Date Conversion Strategy

T. Rowe Price Target Date
Conversion Strategy
A fresh start to more appropriate saving and investing behaviors
T. Rowe Price
Retirement | Insights
Executive Summary
Having pioneered and advocated for today’s automated solutions, including the use of
target date investment options as qualified default investment alternatives (QDIAs),
T. Rowe Price has emerged as a leader in the target date conversion process. Our
experience managing these conversions since 2005 has led to a proven, results-driven
process for sponsors looking to achieve a more optimal asset allocation.
With nearly 80% of investors preferring to delegate or seek input on their investment
decisions, plan sponsors are challenged to find ways to promote successful retirement
outcomes. Research shows that, left to their own direction, some young participants
invest very conservatively by allocating all, or almost all, of their assets to fixed income
investments. Conversely, some participants nearing retirement invest very aggressively,
allocating all, or almost all, of their assets to equity investments.
To help decrease the occurrence of such extremes, many sponsors are adopting strategies
that involve automated solutions coupled with the use of target date investment options as
the QDIA. One such strategy—the target date conversion—has proven especially effective.
It gives participants who choose to stay in the target date investment a “fresh start” using
diversified, professionally managed portfolios that help them avoid such extreme asset
allocations, while automatic rebalancing can help keep them on that track. The strategy
also streamlines the conversion process, and the use of a QDIA may qualify sponsors for
limited fiduciary protection.
For many plan sponsors, conversion is an ideal time to
rethink a plan from the ground up. It’s an opportunity to
apply the latest behavioral insights and industry research
to help participants save and invest wisely for their
retirements. It’s a time to build a plan focused on better
retirement outcomes for participants while being mindful
of their fiduciary responsibility.
By adopting automatic enrollment and defaulting
participants into a target date investment, plan sponsors
can help participants diversify their portfolios and
provide a dynamic asset allocation product that will be
rebalanced over the lifetime of the investment.
Using its innovative target date conversion strategy,
T. Rowe Price can work with sponsors to help them
accomplish these goals and help delegators get on a path
that has the potential to lead to greater retirement income.
Helping participants INVEST FOR their
retirement goals
The strategy takes advantage of T. Rowe Price’s
proprietary infrastructure of automation and applies
best practice considerations to the conversion. By
automating key aspects of the conversion, the strategy is
able to channel employees into potentially advantageous
investment options.
A Strategy at the Forefront
T. Rowe Price has conducted conversion and merger
activities using target date default strategies since 2005.
Our team is well informed on legislation related to
automated solutions, and we continually provide our
clients with regulatory updates.
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Benefits of the TARGET DATE Conversion
Strategy
Increased diversification
Participants who choose not to make an active election
are defaulted into a diversified target date investment
with the target date that is closest to the year in which
they will turn age 65. While diversifying does not ensure
a profit or protect against a loss in a declining market,
it can be an important part of a participant’s investment
strategy. The T. Rowe Price target date solutions invest
in a mix of stocks, bonds, and short-term investments
that gradually become more conservative as the
target retirement date nears. But it doesn’t end there.
Recognizing that people are living longer than ever, the
T. Rowe Price target date solutions continue to adjust
their asset allocation for 30 years after the target date.
Even before the enactment of the Pension Protection Act,
T. Rowe Price had long advocated for many of the act’s
provisions, particularly automatic enrollment, automatic
increase, and fiduciary protection for default investments
that have the potential to result in a meaningful portion
of a participant’s retirement income.
Professional management
All of our target date solutions are managed by the
experienced investment professionals at T. Rowe Price
and backed by our global research network. By investing
in an age-appropriate T. Rowe Price target date solution,
participant accounts could benefit from professional asset
allocation and diversification.
Research confirms effectiveness of automatic services
Industry research shows that most investors are
delegators, preferring to let others make investment
decisions on their behalf or deferring important financial
decisions altogether.1 Our experience is consistent with
leading research on financial behavior and demonstrates
that the majority of participants remain with the default
selection and therefore could benefit from improved
diversification, professional portfolio management, and
rebalancing provided by target date investments.
A fresh start
Instituted at conversion, T. Rowe Price’s target date
conversion strategy can help to overcome participant
inertia. Instead of hindering an effective savings plan,
inertia is turned into the participant’s benefit. Investing in
a target date investment option could allow inexperienced
investors or those with too little time to monitor their
investments to make a fresh start with a professionally
managed portfolio.
Forrester Research, North American Technographics Benchmark Study 2009 (U.S., Canada).
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T. R o w e P r i c e r e t i r e m e n t i n s i g h t s
Helping sponsors manage the
conversion process
Alternative to like-fund mapping
Other conversion strategies, such as like-fund mapping,
may perpetuate a participant’s inappropriate investments
or decisions that were made many years ago and may
no longer be appropriate. A target date conversion
strategy provides sponsors with an opportunity to help
address these issues. Additionally, offering a QDIA such
as a target date investment in combination with other
associated requirements could help sponsors qualify for
limited fiduciary protection.
Streamlined mergers and acquisitions
Investment options offered in the retirement plans of
different companies can vary widely, making like-fund
mapping a complex and time-consuming process. With
an auto-investment strategy, plan sponsors have a more
streamlined method to convert plans of newly acquired
companies with diverse investment lineups.
How our TARGET DATE Conversion Works
This disciplined process spans all stages of the conversion,
and it includes important safeguards for participants as
well as sponsors:
Preconversion—Participants are given the opportunity
prior to conversion (two- to three-week window) to
provide an election for how their existing plan assets will
be invested in the new lineup.
Conversion—Participants who do not provide an election
during this period will have their existing balances
defaulted into a QDIA—in this case, an age-appropriate
investment based on the year they will turn age 65.
Throughout the process, participants receive educational
materials to help them understand their options.
Post-conversion—Participants have the option to stay
in the default target date investment or choose a new
investment allocation at any time. They are not locked into
these decisions/selections.
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Key points:
Participants have the freedom to select their own
allocation before and after conversion by opting
out of the default target date investment. They
are not locked into these choices.
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Target date investments used as a QDIA can
provide limited fiduciary protection.2
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Target date Conversion and Sponsors’
Fiduciary Responsibilities
Meeting the “prudent man” rule
The passage of the Pension Protection Act in 2006
provided important protections for sponsors in their
efforts to improve participant retirement outcomes. From
a fiduciary standpoint, this legislation presents a choice
between perpetuating poor investment decisions and
acting as a “prudent man” to encourage participants to
use diversified investments.
ERISA Section 404(c)(5) extends fiduciary protections
to default investments with certain conditions and
requirements:
1.Participants are provided the opportunity
to exercise control.
2.An annual notice is provided to participants.
3.Default investments are QDIAs.
Solution for outdated lifestage decisions
The T. Rowe Price target date conversion strategy
provides unequivocal legal guidance with clear fiduciary
support. This is not true with like-fund mapping,
where existing fund choices are replaced with those
having similar investment objectives and strategies.
After all, there is no indication that the participant’s
current investment allocation is an appropriate one.
The individual might have chosen the investment many
years earlier when it was appropriate for the participant’s
lifestage, but now perhaps the investment is too risky
or too conservative. With the target date conversion
strategy, there is an opportunity to reset the participant’s
investment allocation to be more consistent with his or
her age and investment horizon.
Plan sponsor must determine that target date solutions meet the requirements of a QDIA and follow the notification requirements.
3
c
More than 80% remain with the
ta r g e t d at e Q DIA
Research among T. Rowe Price clients confirms
that auto-investment can be a particularly effective
way to take advantage of participant inertia, helping
rather than hindering retirement savings plans.
A closer look at the numbers
Retention statistics for target date conversions
through December 31, 2013:3
RetenTION CATEGORY
Conversion
18 months
later
% of plan assets in target
date solutions
79%
% of participants invested
in any target date solution
89%
87%
% of participants with
100% in target date
solutions
82%
75%
72%
The principal value of the target date strategies is not
guaranteed at any time, including at or after the target
date, which is the approximate date when investors turn
age 65. The target date strategies invest in a broad range
of underlying portfolios that include stocks, bonds, and
short-term investments and are subject to the risks of
different areas of the market. The target date strategies
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 target date strategies
maintain a substantial allocation to equities both prior
to and after the target date, which can result in greater
volatility.
Call 1-800-638-7890 to request a prospectus, which
includes investment objectives, risks, fees, expenses, and
other information that you should read and consider
carefully before investing.
For more information on how our strategy can help
sponsors and participants alike, please contact your
T. Rowe Price representative.
T. Rowe Price Retirement Plan Services, Inc.
Since 2005, 41% of conversions completed by T. Rowe
Price full-service clients used the target date conversion
strategy.4
3
Includes new client conversion activity ranging from $1 million to $2.5 billion, from January 1, 2005, to December 31, 2013.
4
Includes client conversions and merger and acquisition activities from January 1, 2005, to December 31, 2013, on the T. Rowe Price Retirement Plan
Services OMNI recordkeeping platform.
Important Information
This article has been prepared by T. Rowe Price Retirement Plan Services, Inc., for informational purposes only. T. Rowe Price (including T. Rowe Price
Retirement Plan Services, Inc., its affiliates, and its associates) does not provide legal or tax advice. Any tax-related discussion contained in this article,
including any attachments, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting,
marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or
professional tax advisor regarding any legal or tax issues raised in this article.
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