Wells Fargo is rolling out a new line of target-date funds that deploy actively managed strategies, the latest indication that the TDF market is evolving to address concerns that a fixed glide path strategy may expose some investors to too much risk as retirement nears.
The new line—The Wells Fargo Dynamic Target Date Fund—will deploy proprietary risk management strategies, making for a more responsive option to market volatility relative passively managed TDFs, which automatically rebalance equity and fixed-income ratios relative to a set glide path, and not market conditions.
Wells is banking that those strategies will help capture opportunities in equity markets, while managing against short-term market gyrations, and ultimately position savers closer to the goal of replacing 80 percent of their income in retirement, an objective that Wells Fargo research says incumbent TDF strategies have failed to do.
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"Asset allocation is an effective diversification tool over the long-term, but an imprecise and blunt instrument in the short term," said Ron Cohen, head of defined contribution distribution for Wells Fargo Funds Management.
"A glide path arguably needs to be aggressive enough to meet the participant's investment goals, yet also be conservative enough to hedge against market losses, particularly close to retirement—but it's difficult for a standard glide path to be both aggressive and conservative at the same time," said Cohen.
In an email, Cohen said the adoption of the new strategy does not make Wells' existing line of TDFs obsolete, but rather will compliment more passive strategies.
"Both strategies can deliver what we feel is the most important feature of a TDF strategy–downside protection in the years approaching retirement–in different, complementary ways," he said.
The new actively managed funds, which will be offered in five share classes, including R6 shares, will come at a cost, but Cohen says the premium for the active strategies is in part tempered by using lower-cost EFTs for the passively managed portion of the funds. The funds' expense ratio will fall in the middle of its peer group, said Cohen.
Recently, Dimensional Fund Advisors introduced a new line of TDFs that purports to use hedging strategies to protect against interest rate and inflation risk.
For his part, Cohen sees the future of the TDF market bifurcating, much as the mutual fund market has relative to passive and active management approaches.
"Many target date managers deemed 'active' today invest in active underlying funds, but follow a relatively static glide path. Since asset allocation tends to drive a funds risk and return, we feel that an active TDF strategy must have the ability to adjust its asset allocation in response to changing market conditions in order to meaningfully hedge against the volatility and drawdown risks that investors face near retirement," explained Cohen.
Eventually, plan sponsors will demand more tangible risk-return benefits in exchange for paying for those active fees buried in the cost of traditional TDFs, thinks Cohen.
As is, TDFs hold about $700 billion of retirement savers' assets and are by far the most popular qualified default investment option.
In the future, Cohen sees two camps of TDFs emerging: one preferring lower-cost passive strategies, and one willing to pay for active strategies that hedge against volatility and downside risk.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
