Most lifecycle and target-date funds have too much equity exposure and are subject to too much risk for participants in retirement, according to the Putnam Institute, a new research and educational organization financed by Putnam Investments.
Putnam advocates a conservative asset allocation of equities in retirement — 5% to 25% — to mitigate downside risk and to make sure participants don’t outlive their savings, W. Van Harlow, research director of Putnam Institute, said Tuesday at a New York news conference.
Noting that some target-date funds have equity allocations ranging as high as 65% at the traditional retirement date corresponding to age 65, Mr. Harlow said these allocations are especially vulnerable to “sequence of return risk” — problems retirees face if stock markets take a beating in the early years of their retirement.
“This is the biggest risk to retirees,” said Mr. Harlow, noting it is more important than inflation risk or longevity risk.
“If mitigating the risk of outliving one’s retirement resources is the cornerstone of the asset allocation, it is critical to limit equity exposure and recognize the impact that investment volatility can have on the sustainability of the retirement plan,” said a report on Putnam’s research.
Putnam’s research also concluded that “it makes no sense to continue rolling down equity exposure past anyone’s true target date,” the report said. “Funds that do so are overly risky and misleading.”
Putnam also released a separate survey of working adults showing that to maintain adequate income during retirement: “The savings rate is the most important thing people can do at any level,” said Robert L. Reynolds, Putnam Investments president and CEO at the news conference.
The survey examined participants’ readiness for retirement using Putnam’s Lifetime Income Score, which estimates the percentage of current income participants replace in retirement from Social Security, retirement savings, investments and other sources. For example, a lifetime income score of 64% — the median for all respondents — means they can expect to replace 64% of current income when they retire.
The summary noted that enrollment in defined contribution plans improves lifetime income scores and that higher deferral rates also raised these scores. Households’ contributing 10% or more of income to DC plans had a score of 124%, while those contributing 4% to 10% had a score of 84%. Respondents who didn’t contribute had a score of 58%.
The research was based on an online survey of 3,290 working adults between the ages of 18 and 65 conducted by conducted for Putnam by the research firm Brightwork Partners. The survey was conducted in December 2010 and January 2011.