New Russell Research Supports More Aggressive Glide Path in Earlier Years
Tacoma, WA — November 6, 2006 — Original research by Russell Investment Group has determined that typical defined contribution participants can benefit from more aggressive asset allocation in the early years of saving and investing for retirement. As a result, the firm has adopted a refined methodology for constructing target date funds and has announced changes to its LifePoints® Funds, Target Date Series, comprised of four target date portfolios available to defined contribution plan participants.
Russell's Approach to Target Date Funds: Building a Simple and Powerful Solution to Retirement Savings by Grant W. Gardner, Ph.D., senior balanced fund strategist, and Yuan-An Fan, Ph.D., senior research analyst, presents a method for constructing what Russell believes is the optimal "glide path" for a target date fund. The glide path is the evolution of the mix of equities and fixed income over the life of the fund. Russell's glide path is designed to meet the needs of a typical defined contribution participant, taking into account current income levels, projected future income growth, retirement contribution rates and retirement income needs. The typical participant has the goal of building enough wealth at retirement to maintain his or her pre-retirement standard of living.
Russell's glide path is specifically designed to manage the risk of failure in achieving the goal of replacing 42% of pre-retirement income of $80,000, an amount determined necessary for maintaining a pre-retirement standard of living for typical income levels in a 2004 study by Aon Consulting and Georgia State University. Based on Russell's assumptions and this research, this glide path is optimal in the sense that it meets the needs of the typical participant better than other glide paths compared in the analysis.
The research finds that typical participants can tolerate the risk of an all-equity portfolio in earlier years when they have many years of future savings available to offset investment losses. In contrast, a more conservative portfolio with the majority of assets held in fixed income is called for in the final few years before retirement as well as after retirement.
"The changes made in the funds' glide paths were in response both to Russell's ongoing research into investor behavior as well as plan sponsors' needs. We believe the new glide path provides shareholders of our LifePoints Target Date funds with an improved opportunity to meet the goal of building an adequate retirement portfolio" said Matt Smith, managing director, Russell Retirement Services.
Russell modified the glide path of its 2010 Strategy Fund, 2020 Strategy Fund, 2030 Strategy Fund and 2040 Strategy Fund. Each fund is designed for investors who plan to retire close to the target year indicated in the fund name. The changes to the allocation to equity and fixed income underlying funds for each Target Date fund are as follows: