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By David Falkof | 06-11-2013 02:00 PM

New T. Rowe Target-Date Series Aims for Less Volatility

T. Rowe's new target-date strategy differs from its flagship product by providing a lower equity allocation at retirement time and creating more predictability of returns, says manager Jerome Clark.

David Falkof: Hi, I’m David Falkof I’m a mutual fund analyst for Morningstar. And I’m here today with Jerome Clark, a portfolio manager for T. Rowe Price's Target-Date Series of funds.

Jerome, thanks for being here.

Jerome Clark: Thanks for having me.

Falkof: Jerome I wanted to talk sort of broadly about target-date funds first. Most investors are accessing target-date funds in their 401(k)s, and typically there is just one option, there may be a number of years that they are able to choose from, but there is one glide path--the mix of stocks and bonds over time. And T. Rowe, for a long time, its flagship Target-Date Series has a "through" investment option. I was wondering if you could sort of talk about the rationale behind your current flagship T. Rowe Price Target-Date Series.

Clark: Well, the current retirement fund--that’s our flagship product--is designed for lifetime income for investors. And so, with lifetime income, we’re talking about long life expectancies providing income over a long period of time. When we’re weighing the different investment risk and how we’re going to balance between market risk, inflation risk, and longevity risk, because of that focus on lifetime income, what our analysis shows us is that we need to have a tilt toward longevity inflation risk, which means we have a higher-than-average equity allocation for our funds.

Falkof: And now you’re launching a new Target-Date Series, that’s going to have a different glide path, maybe less equity exposure over time. Could you talk about the rationale behind that and some of the differences and what types of investors would be interested in this new Target-Date Series?

Clark: Sure. Well, as I said the objective of the retirement funds is to address lifetime income. This new product is to address a different objective. What we have found is that there are a fair amount of investors who are more interested, have more of a focus on maybe more moderate volatility to support a shorter withdrawal horizon for their assets in retirement. So, this product was designed for that type of investor.

Falkof: And what are some of the key differences between the two series?

Clark: Well, I’d say the beauty of it is that there is one key difference: It's the equity strategy for the two products. When you look underneath everything else, the diversification that we have within the retirement funds, it’s the exact same asset classes and sectors that are represented. It's the exact same underlying funds that are in the retirement funds which are in the new target retirement product. Then, the tactical allocations that have enhanced returns for our retirement funds over the last several years, we’re going to be applying those same tactical allocations in the exact same manner.

So, it’s really about the glide path differences. So, for example when you look at our equity strategy for both funds, they both start off at 90% equity allocation. But by the time these two different products hit retirement, our original series of retirement funds are at 55% equity allocation as opposed to the new product which has 42.5%, a 12.5% difference.

It sounds small, but is actually meaningful when you look at the outcomes and different metrics that we’re measuring for participant outcomes, or investor outcomes. And then, eventually, those two products come back together at 20 years post retirement and they continue to have the same strategy thereafter.

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