T. Rowe Price Group said Thursday it would raise the equity components of its two target-date mutual fund series based on two years of research that showed retirement plan participants may need more growth-oriented investing to meet their goals.
"This is the first real meaningful change in our glidepaths," Wyatt Lee said in an interview, referring to the T. Rowe Price Retirement Funds and the T. Rowe Price Target Funds. Mr. Lee is portfolio manager and head of target-date strategies in the company's multiasset division.
The company's research indicated that many participants aren't saving enough to reach an annual retirement plan savings goal of 15% of salary, he said. And as people live longer, they must save more due to increased longevity risk.
T. Rowe Price had $292 billion in target-date fund assets under management as of Dec. 31. The former, which was launched in 2002, accounted for more than 95% of assets. The latter, launched in 2013, accounted for about 1%. The rest of the target-date assets are in custom products, which will be handled on a case-by-case basis, spokesman Bill Benintende said in an email.
Mr. Lee said the glidepath adjustments will take place over two years.
The major equity percentage increase for both target-date series' glidepaths will affect fund vintages that are at least 30 years away from a fund pegged to a retirement date. For example, if a participant's retirement date is pegged to the 2020 fund in the T. Rowe Price Retirement series, the equity percentages will be raised to 98% from 90% for the 2060, 2055 and 2050 funds.
After 2050, the equity percentage will decline to reach 55% for the 2020 fund — the same as the current system. If a participant holds the 2020 fund past retirement, the equity component will continue to decline until reaching 30% at the end of 30 years vs. the current 20% end-point.
T. Rowe Price uses a "through strategy" for its target-date funds: the equity/fixed-income ratio changes over time after a retirement date. A "to strategy" means the ratio remains fixed once a retirement date has been reached.
For the T. Rowe Price Target series, the post-retirement equity change is the same — a gradual decline over 30 years to 30% vs. the current 20%.
The equity component for vintages farthest from retirement will be 98% vs. 90% for the 35 years before the retirement date fund. If the retirement date is pegged to the 2020 fund, the higher equity percentages would affect the 2060 and 2055 funds. Then, the equity amount would drop until it reaches 42.5% for the 2020 fund — the same as the current system.
Mr. Lee said T. Rowe Price will add a value-oriented, actively managed emerging markets stock fund to both target-date series to manage risk for and to diversify the current exposure to an actively managed growth-oriented emerging markets equity fund.
For some of the target-date funds, the firm also will add a U.S. Large Cap Core fund. For both additions, Mr. Lee said T.Rowe Price will replace some passive investments, noting that these additions will not cause fees to rise.
Mr. Lee added that starting in April 2020, the T. Rowe Price target-date series will have a "unitary, top-level fee structure" in which expense ratios won't be affected by different management fees or expenses of underlying funds.
This new structure, which only affects the mutual fund target date series, "is much more simple and transparent," he said. There will be no increase in fees, and some portfolios' fees will be lower, he added.
