Target date funds are missing their mark—something Wells Fargo aims to fix.
Financial advisors typically recommend that investors aim to replace 80 percent of their pre-retirement income. Yet, the average target date glide path may fail to consistently meet this goal.
To address the challenge, the company announced the Wells Fargo Dynamic Target Date Funds. It’s an investment the company claims offers a new approach designed to give plan participants what we believe is the best chance of meeting the 80 percent goal.
“Until now, target date fund managers have faced a conundrum,” Ron Cohen, head of defined contribution distribution for Wells Fargo Funds Management said in a statement. “In the years leading up to retirement, 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. Wells Fargo Asset Management has developed a new approach that is intended to address this challenge.”
In addition to creating a broadly diversified portfolio with enough equity exposure to help participants achieve their target goal, portfolio managers Christian Chan and Kandarp Acharya employ a set of risk management techniques that include tactical asset allocation and a patent-pending dynamic risk management approach.
“Asset allocation is an effective diversification tool over the long-term, but an imprecise and blunt instrument in the short term,” Chan explained. “We use three active risk management techniques to help manage the portfolios during times of volatility while also allowing us to opportunistically pursue compelling investment opportunities.”
These techniques are:
- A proprietary tactical asset allocation model that allows the managers to pursue market opportunities and create the potential to generate additional excess returns in a risk-conscious manner
- A set of volatility management tools that help moderate the impact of short-term market gyrations, particularly within the equity exposure
- A tail risk management overlay strategy that strives to improve participant outcomes by managing excessive volatility and the risk of large, unpredictable downside events
“Because plan participants reach retirement during different market conditions,” Chan added, “it’s key to have the tools to moderate short-term volatility and limit the impact of sudden, unexpected market losses. Our process allows us to do just that.”
The funds are available in five share classes: A, C, R, R4, and R6. Funds are offered in five-year increments from 2015 through 2060, as well as a Dynamic Target Today Fund. The series’ glide path continues to reduce risk for 10 years after the target date before reaching its landing point.
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.
