An asset allocation strategy that's founded upon the traditional principles of pension investing and a multi-manager investment approach for a broad range of investment options is what Chicago-based Van Kampen Funds believes are the key elements for the next generation of target-date funds.
These elements are also the hallmark of the firm's latest target-date funds, the Van Kampen Retirement Strategy Funds.
"This is our first inroad into the target maturity space but we are bringing an offering that really differentiates itself from other products out there because of its next-generation thinking," says Andrew Scherer, managing director of U.S. Intermediary Retail and Sales at Van Kampen. "We wanted to create a product that best serves the needs of plan sponsors and plan participants. We have done that by bringing some of the principles that have been practiced in other fiduciary functions to create a product that brings a higher fiduciary standard," to retirement plan participants.
According to Scherer, only 15% of target-date funds are currently using multi-manager strategies. To meet the perceived needs of advisors for that approach, Van Kampen teamed up with Russell Investments, a leader in manager research and evaluation, to offer nine funds with target retirement dates from 2010 to 2050 (in five-year increments) and an "In Retirement" fund. Each fund is structured as a fund-of-funds, investing primarily in a combination of Van Kampen-managed mutual funds and multi-firm managed funds advised by Russell Investments, thereby creating an added level of diversification with top proprietary and institutional investment managers from a range of asset management firms handling the different investment assignments.
"The market needs this third-party element," Scherer says. "Financial advisors have indicated that they would want to see it in new target maturity funds, and given the status target-date funds have as qualified default options for auto-enrollment in retirement plans, you would want to bring the best practices that have long been used in the defined benefit space to the target-date space."
Each Van Kampen Retirement Strategy Fund achieves diversification through allocations to nine distinct asset classes, including international equities and real estate securities. Additionally, the funds invest an increasing amount in inflation-indexed securities (TIPS) as they approach the target retirement date to address the risk of inflation.
As it is increasingly common for plan participants to transition into retirement over a period of years, the funds will manage risk reduction through an individual's entire accumulation phase and another 15 years beyond the retirement date.
"At the end of the day, these products are designed to help people have a secure financial lifestyle during retirement," Scherer says. "We think it is important to take the principles that have long been used in the defined benefit arena and bring them to the defined contribution space."
In tandem with the launch of the new Retirement Strategy Funds, Van Kampen has also introduced a educational program for advisors on target-date funds.
"We have a kit called 'Targets' that educates advisors about the Pension Protection Act (PPA), about how advisors can approach their plan sponsor clients and explain the benefits of target-date funds, and how they meet the needs of the PPA," Scherer says.
Another key element of Van Kampen's advisor education program--which was built on proprietary research conducted for Van Kampen by the research firm Luntz, Maslansky Strategic Research--examines the language typically used to describe target-date funds and how different word choices can more powerfully communicate the concepts underpinning these investment strategies.