As the economic slump curbs retirement savings, Great-West Retirement Services is trying out what its president is calling "the next generation" of target-date funds.
In creating the Maxim Lifetime Asset Allocation Series funds, the company had the limitations of earlier-vintage target-date funds in mind, said Charlie Nelson, its president. "The design of these funds is focused to address a number of the concerns from the industry, regulators and Congress," Nelson said in an interview.
Those concerns focus on performance. According to the research firm Lipper, on average target-date funds that mature in 2010 lost almost 25% last year.
Funds with near-term target dates were supposed to be extremely low-risk, so the lousy results have led Congress to question whether legislation is needed to protect aging Americans.
Great West's Maxim Lifetime Asset Allocation Series, which the Greenwood Village, Colo., company unveiled June 15, differs from most target-date funds in that it offers three "glide paths," or ways in which their allocations change over time, Nelson said.
The glide paths range from conservative to aggressive, and the asset allocation is designed to continue past the funds' retirement target dates. Nelson described the funds as "hybrids between target-risk and target-date funds."
Great-West Retirement Services, a unit of Great-West Life and Annuity Insurance Co., is also touting its third-party consultation: Ibbotsen Associates helps determine each fund's asset allocation strategy.
Twenty investment managers run the funds, and 28 underlying funds are used in a fund-of-funds approach designed to ensure diversified asset allocation. The funds also blend active and passive management, according to Great-West.
Doug Dannemiller, a senior analyst with Aite Group LLC, said these types of offerings could do wells. "There is plenty of room for good income products to be associated with defined contribution plans," he said.
But he said target-date funds have considerable shortcomings despite the improvements Great-West and others make. An actively managed portfolio is preferable to a "set it and forget it" model, he said, because it lets investors reallocate their portfolios when markets are rising or falling abruptly.
For engaged, sophisticated investors, choices like exchange-traded funds, with the guidance of an adviser, are optimal. At the same time, target-date funds are preferable to money market funds as a defined contribution default option, Dannemiller said.
Great-West started designing its Maxim target-date funds last fall amid concern about declines in retirement plans. Overall, defined-benefit retirement accounts fell 21% in 2008 to $3.8 trillion, according to Spectrem Group, a Chicago research company.
"We started hearing concerns by plan sponsors," and there were "some worries in Washington," Nelson said. "We felt there was the opportunity to come forward with an enhanced solution."
Great-West, which has 60 wholesalers for its retirement products, plans to hire a dedicated wholesaler for the target-date funds.
The company is hoping that the funds will appeal to sponsors as having a strong fiduciary process, Nelson said. "The risk component in the first generation was not clearly understood by some," he said. "We are trying to provide tools plan sponsors help figure out which is the most appropriate one for their organization."
Banks can expect to hear more about Great-West's expanded product roster shortly: The company has added "a handful" of dedicated bank channel wholesalers within the past three months, Nelson said.
Great-West plans to roll out more retirement income products for the defined contribution market by the fourth quarter, Nelson said. "Most of the guaranteed-income solution products in the market were individual variable annuity products that were retrofitted for the retirement market," he said. "We're trying to address them specifically as a product just for the retirement market."
Great-West is not the only company touting new and improved alternatives to retirement-focused investment products.
On June 1, John Hancock Financial Services, a Boston unit of Toronto's Manulife Financial Corp., introduced AnnuityNote, a stripped-down annuity with a built-in income guarantee. The product, which Hancock is positioning as an alternative to more complicated and expensive variable annuities, is built to compete with mutual funds, Tom Mullen, the chief marketing officer for John Hancock variable annuities, said in an interview.
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