Target-date, or life-cycle, funds have been around since 1993. They appeal to investors seeking a "set it and forget it" approach to retirement saving that can simplify their investment decisions.
The funds have been enormously popular since their introduction. There are now over 250 target-date/lifecycle funds available, and according to the Investment Company Institute, the funds had attracted more than $185 billion by the first quarter of 2008; almost 90 percent of that amount was held in retirement accounts.
During the current market downturn, these funds have been drawing criticism over their asset allocations, however. Several of the largest funds with maturity dates of 2010 had equity allocations of 50 percent or more, including a healthy dose of international holdings. Consequently, many of these largest funds in the 2010-category had year-to-date losses of 20 to 30 percent through October.
Although the funds' losses are relatively less than those experienced in the broad U.S. and global markets, some sources in the financial news media are beginning to question the wisdom of the underlying investments.
In spite of the challenging environment, Van Kampen Funds, a unit of Van Kampen Investments, recently announced the launch of the Van Kampen Retirement Strategy Funds, a new series of target-date funds. The funds bring together Van Kampen and Russell Investments, a well-known leader in third-party manager selection.
The series consists of 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.
"The market is evolving to the next generation of target-date funds, where asset allocation founded on pension principles, multi-firm management, and a broad range of asset classes are essential elements," says Andrew Scherer, managing director, U.S. intermediary retail and sales.
According to Van Kampen, each fund achieves asset-class 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.
"Van Kampen understands that financial advisors work with a wide range of individuals and that their clients have different existing financial situations, different retirement goals, different levels of tolerance for risk, to name only a few," Scherer explains. "That said, financial advisors can use the Van Kampen Retirement Strategy Funds as a core component for their clients' retirement planning. The Retirement Strategy Funds meet the Pension Protection Act's standards for a qualified default investment option enabling plan sponsors to automatically enroll their defined contribution plan participants into the funds. The Retirement Strategy Funds are designed with the goal of preparing 401(k) participants to have sufficient income during retirement."
More information about the new funds is available online at: