Passive investment evangelists Dimensional Fund Advisors is entering the target-date market, and per their well-established reputation, they’re doing it differently than anyone else. The investment management firm, who counts Nobel laureates as investment advisory board members, launched Dimensional Target Date Retirement Income Funds on Monday. It says the series of 13 funds “are carefully designed to address market, interest rate, and inflation risks leading up to and throughout retirement.”
It follows traditional target-date fund models in the early stages of accumulation, but differs as the investor approaches retirement by shifting to uber-safe investment vehicles like treasury inflation-protects securities and similar products, also known as liability-driven investing.
“Defining and managing the right risks are critical when determining any asset allocation. A good target date solution should balance the tradeoffs between growth investments and an appropriate risk-hedging asset,” Dimensional chairman and co-CEO David Booth said in a statement. “Our target date strategies are designed to manage relevant risks, in particular, interest rate and inflation risks, so investors are less exposed to the effects of random market forces. This may reduce uncertainty about how much consumption their investments will support in retirement, and enable plan sponsors, consultants, and financial advisors to use meaningful information about expected retirement consumption to help investors plan for a more successful retirement.”
Dimensional co-CEO and co-CIO Eduardo Repetto added, “Today, the majority of target date funds have managed what we feel are non-crucial risks. They may sacrifice asset growth goals without reducing uncertainty about expected retirement consumption. We feel this means some investors may be incurring opportunity costs without addressing a benefit relevant to what should be the correct goal for retirement: income.”
The Dimensional Target Date Retirement Income Funds use asset allocation strategies to invest in income growth investments (global equities and fixed income) as well as income risk management investments.
The portfolios aim to address market, interest rate, and inflation risks with a hedging strategy based on established liability-driven investing theory and an inflation-protected fixed income portfolio. Allocations between income-growth investments and income risk management investments shift over time to become more conservative as individuals near retirement age, as well as through retirement, to manage relevant risks and support retirement consumption.
“Plan sponsors may determine that the Dimensional Target Date Retirement Income Funds may be appropriate to add as their retirement plan’s qualified default investment alternative (QDIA) or as an additional investment option,” the company concludes. “The funds are available to plan sponsors, consultants, and financial advisors.”
Dimensional is also introducing tools to help plan participants and retirement investors evaluate possible investment outcomes based on information about their current retirement savings and goals.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
