Massachusetts Mutual Life Insurance Co. is introducing a new target-date fund family that aims to protect 401(k) savers from market volatility right before and just after retirement.
“The five years before and after retirement can be a particularly vulnerable time for retirement savers,” said Tina Wilson, head of MassMutual Investment Solutions Innovation, in a statement. “With a relatively short time horizon to recoup investment losses, pre-retirees and retirees risk significantly diminished assets and retirement income from market corrections and volatility. Unfortunately, some retirees may be taking more risk than they realize.”
According to the MassMutual Retirement Savings Risk Study, 94 percent of retirees and 92 percent of pre-retirees “strongly agree” or “somewhat agree” that taking steps to avoid major stock market losses right before retirement is important.
The Legg Mason Total Advantage Funds are designed to manage investment risk using a series of active and passive strategies that aim to deliver upside return and reduced volatility, the company said. The funds’ asset allocation adapts over time and reduces equity exposure as the saver nears retirement and replaces it with fixed income and stable value. The equity weight can shift as high as 97 percent for those with over 30 years until retirement to as low as 34 percent for those who have left the workforce.
Because the funds use stable value to reduce risk, their equity investments are able to be somewhat more aggressive with more upside potential than what other target-date funds may be able to provide, said Ken Verzalla, vice president of product & marketing for MassMutual U.S.
Sixteen different managers manage the investments. Total expenses are reduced by combining active and passive funds in the portfolios, Verzalla said. The Legg Mason Total Advantage Funds are collective investment funds, which also helps expenses and volatility low, he added.
While protecting investors as they nears retirement is critical in the design, the funds also use tactical investing in the early years of the glide path to benefit younger savers. “For those who are starting to invest in their 20s and 30s, not only will you have the traditional equity exposure that many are familiar with, the tactical accelerator allows the potential to enhance those returns in a way that other target date funds may not be able to because of their glide path management,” Verzalla said.
Financial advisors have been especially interested in certain aspects of the funds. “One is the inclusion of the stable value asset class. There’s quite a bit of target-date funds that have traditional bond exposure, market value bond exposure,” he said. “As interest rates have risen, participants that are in or nearing retirement have seen a decrease in their assets within the fixed-income component because interest rates have increased, where stable value has had a positive return.”
“The delta between the market value bond that’s gone down and stable market value that’s providing the stability of return, for advisors that’s been a real interest,” he added.
The multimanager approach has also been of interest to advisors, said Verzalla. The Legg Mason Total Advantage Funds’ architecture gives investors access to not only Legg Mason managers but also to a wide array of external managers. The funds are sub-advised by a Legg Mason-affiliated manager, QS Investors LLC, which has expertise in multi-asset class portfolios.