Episode 53 – New Retirement Strategy Fund for DCP and Plan 3
Episode transcript:
[music intro]
Jenny
Welcome back to Fund Your Future with DRS. And this January we are updating the target date fund options for investment accounts in DCP, Plan 3 and JRA. So today we’ve got Chris from AllianceBernstein here as our guest. He helps manage the Retirement Strategy Funds and here to talk about some of the benefits. Thanks for joining us today Chris.
Chris
Thanks for having me on today Jenny.
Jenny
Yeah. So to start off, can you remind us and our listeners, what a Retirement Strategy Fundis and how it works?
Chris
Sure. A Retirement Strategy Fund, also known as a target date fund, typically has a date in its name. This is called the fund’s target date. And the target date is the approximate year when you expect to retire and begin withdrawing from your account. These funds are found in five-year increments, and they contain a diversified mix of investments that adjust automatically over time.
The funds are monitored regularly and the investment mix changes as the target date approaches. When you’re in your early working years, the emphasis of the fund is on growth in order to build savings. As you move toward retirement and continuing for 15 years beyond your target date. The investments of the fund gradually evolve, becoming more conservative to help protect against market fluctuations. And it all happens automatically.
Jenny
That’s awesome. Yeah, like I know, for example. So, I’ll be 65 in the year 2050. So, I’m in the 2050 target date fund.
Chris
That’s perfect Jenny, just as they’re intended to be used.
Seth
Chris, you mentioned in your last response that these funds, the balance of what is in them changes over time, as far as the mix. So, could you tell us a little bit about what investments are inside the Retirement Strategy Funds?
Chris
Sure Seth. The funds contain a well-rounded mix of investments, including a variety of equity and bond funds. But what makes the Retirement Strategy Fundsomewhat unique is that they include a few diversifying investments that are not available on the core lineup. Exposure to these diversifying asset classes vary by age in order to reduce risk specific to that age group.
Jenny
Yeah, I know that people talk a lot about diversifying when it comes to investing. Can you talk a little more about diversifying investments and which ones are included in the funds?
Chris
Absolutely. Diversifiers are assets beyond basic stocks and bonds that provide exposure to different groups of investment opportunities. They’re complementary assets that sometimes include real assets, real estate and noncore bonds. The benefit they bring is that they behave differently from traditional stocks and bonds, and these different return patterns can help further diversify a portfolio. Some diversifiers are particularly helpful, for example, when inflation is higher because they tend to fare better in financial assets.
One example there are TIPS, Treasury Inflation Protected Securities, that are designed to provide inflation protection. And they’re included in the funds, along with global reach for real estate investment trusts, to provide another form of inflation minimization. Additionally, the Washington State Investment Board also made the decision in 2021 to include a suite of investments called TAP or the Total Allocation Portfolio in their Retirement Strategy Funds.
Seth
So, Chris, you mentioned a little bit in a previous answer about how these funds are designed to take people beyond their retirement. And so, could you just tell us a little bit about how the Retirement Strategy Funds what their investment philosophy or the benefits of being in a Retirement Strategy Fund would be?
Chris
Sure Seth. And one thing I’ll start with is that the funds are professionally monitored and the investments, as you just alluded to, adjust over time. They automatically provide members with an investment risk, investment mix and a risk profile that’s appropriate for their age group. The changing mix strives to balance the four major risks facing members. Growth risk, which is the potential for lackluster performance if equities deliver subpar returns over the long term. Inflation risk, meaning the same amount of money will buy fewer things in the future as prices increase. Market risk, the possibility of a financial loss due to poor short-term performance in the financial markets. And longevity risk
The risk of out living your savings and your income sources. The funds are also regularly reviewed to make sure current market conditions are addressed. And of course, member demographics, plan philosophy are both taken into account as well as when managing the investment glide path. Again, that’s how the investments change and evolve over time. And past performance does not guarantee future results. Investing in a target date fund does not guarantee sufficient income at retirement or protect against loss of principal.
Jenny
Nice. That’s what I love about DCP is that it is all managed for you. And I can just defer that money towards my account and not have to worry about where I’m investing. So obviously, the main reason we’re chatting about Retirement Strategy Funds today is because there is a new fund coming on board for those who would be retiring around the year 2070. Do you mind talking a little bit about the new fund?
Chris
No, not at all. And while 2070 sounds like a long time away, on January 3rd of next year, two changes will occur within the funds. The creation of the new 2070 strategy fund, which would be appropriate for younger members, and the consolidation of the 2010 Retirement Strategy Fund into the Retirement Maturity Strategy Fund.
Jenny
So, what’s kind of the main message for those who are in that 2010 strategy fund?
Chris
For people in the in the 2010 retirement Strategy Fund, they don’t have to do anything. And we’re only consolidating those two funds because given the change in the fund over time, the 2010 Retirement Strategy Fundin early 2025 will have the identical allocation to the Retirement Maturity Strategy Fund.
Seth
So, Chris, you kind of alluded to this in your last two answers, but this is something that happens regularly every five years. The strategy funds are in five-year increments. And so, every five years a new fund comes into play. And the — I don’t know how to say this — the fund for the oldest folks moves into that maturity fund.
And so, we always maintain the same number of strategy funds. But as new people come into the workforce, their retirement date is going to be out farther in the future. So that’s the reasoning. These new funds get rolled out every five years. Is there anything else that you want to get on that?
Chris
No, no, I think you’re exactly right. This happens roughly every five years, and we want to limit the number of Retirement Strategy Funds in the entire plan. So once a vintage allocation becomes the same as the retirement maturity strategy, we’ll roll that fund into the retirement maturity strategy. And that’s about 15 years after its target date.
And the allocation at that time is 31% stocks and 64% in bonds and 5% and in real assets. And then, as you also alluded to, the establishment of the 2070 retirement fund will enable new plan members who are younger to invest in a well-suited mix of growth-oriented assets that’s appropriate for their age. And when they expect to retire.
Seth
Yeah, it’s a little, I don’t know, scary, intimidating? I don’t know what the right word is. To think that there are people starting work now that are going to be retiring in 2070. I imagine when we create the 2100 fund, that’s going to be a big milestone as well. Thinking that new employees are going to be retiring in another century. Something to look forward to.
Chris
They seem a long way off and they come up quickly.
Seth
Yes. Yeah, they do. It does feel like we do this more frequently than every five years. But we do want to remind people that there’s always a fund that is appropriately based for their age. And Chris, I want to just get back in, highlight one thing that we touched on briefly, but maybe give you a chance to expand on it a little bit, that these funds are really, one
They are the default funds, as Jenny mentioned, for our Plan 3 members in our Deferred Comp plan participants, and that if a person doesn’t make an active choice in those plans, they’re defaulted into one of these Retirement Strategy Funds, though people can choose other funds if they desire.
But you touched on that these funds are designed for someone to start drawing their funds out when they turn 65, but it’s meant to be invested for the rest of their life. Hopefully that’s a fair way to say that. Could you expand on that a little bit more?
Chris
Sure. These funds take into consideration some of the key tenants in having an appropriate asset allocation for an individual, one that’s age appropriate, one that’s rebalanced, one that evolves over time, and one that’s focused on the two broad stages of their life. One is an accumulation those years when they’re working and when they’re saving, and then also in retirement, when they’re drawing down their funds and it’s meant to help, facilitate the accumulation of wealth when someone’s working as well as to help them have an age appropriate and a well-diversified asset allocation that they could use to draw upon those assets for, those years in retirement.
Seth
I think that’s a really critical point. I want to make sure listeners understand that oftentimes with these savings vehicles, whether it’s in Plan 3 or the Deferred Compensation Program, the expectation isn’t that people will need all of that money at age 65. It’s very possible that that money could last them another 20, 25, 30, 35 years. If you lived to be 100 years old, which is a real possibility.
So that money, some of those funds as you described, are still invested in assets that the intent is that they will continue to grow, though more of the assets, as you get older, become more conservative, preserving the gains in the account that you already have built up over time.
Chris
That’s correct Seth. We want to preserve members ability to spend in real terms or inflation adjusted returns, throughout their retirement. And again, someone doesn’t have to make any sort of change to their allocation. This is all happening automatically within the retirement strategies funds.
Seth
Which is exactly why we’re moving those folks in the 2010 to that retirement, maturity fund. It’s all happening automatically for them. They don’t have to make any active choice or decision in that. So usually when we have a guest on the podcast, we ask them to reference where they can go to get additional information. But in this case, all the information lives on the DRS website.
So, I would just want to point our listeners, if they’re interested in more information about the retirement strategy, funds for Plan 3 or DCP, you can go to the DRS website at drs.wa.gov, and visit the DCP or Plan 3 investment pages and in both those pages will show the entire fund lineup, including the Retirement Strategy Funds.
And you can look more closely if you’re interested in what that asset allocation breakdown is that we’ve talked a little bit about and see the way the funds change over time.
Jenny
I had an additional question as well. Wasn’t on the original schedule, but with the Retirement Strategy Funds, the that it’s based on the idea that you are going to retire at 65. So, say someone has been in DCP for 20 years with this idea that they’re going to retire at 65, and then maybe at age 50, they come into some money from a relative and they think, oh, well, maybe I can retire at 60 instead of 65.
Is it ever recommended that they then change their retirement strategy fund, change the target date?
Chris
You know, an event such as that would be a really good time for someone to reevaluate their personal circumstances and their financial goals. But the funds are designed to align with when someone expects to retire. So, if that ended up moving their retirement from, 2030 to 2025, could they consider moving from one fund to another?
Absolutely. And that would then align with their new expected date of retirement. What that would mean in practice if you changed your, retirement date is you would move to a slightly more conservative allocation that’s appropriate for someone who is moving now from saving to spending. Someone who’s retiring earlier is going to likely have more time that they’ll need to draw on their assets in retirement.
So, you know, they should think about their own circumstances. But what you described, Jenny, would be, really what the funds are designed to do if that retirement age changes and changes by enough 4 or 5 years, then changing the retirement, strategy fund that you’re in would be a reasonable change for a member to make as well.
Jenny
Gotcha.
Seth
I really appreciate that question to Jenny, because I think we see some folks who end up having kind of the opposite where they’re 55 and they’re realizing, “oh, I haven’t saved anything for retirement. And maybe I’m planning on working till I’m 70.” Maybe a slightly more aggressive Retirement Strategy Fund makes sense for their circumstance. Not that any of us on this podcast are providing financial advice or making recommendations on what people invest in, but that does make sense to, as Chris was saying, reevaluate kind of your overall personal circumstance and what your actual target date is
Jenny
Gotcha. Yes, of course, always, we recommend talking to a personal financial advisor.
Chris
And I would agree with what you just said as well Seth. And the benefit of the retirement strategies funds is it doesn’t leave to the member to try and figure out, well, how should I change that mix of growth oriented assets or equities versus defensive assets or bonds? Because now I’m thinking of retiring earlier or later. If you’re retiring five years earlier or later, you could move into the fund that’s aligned with that new date of retirement. And again, everything will happen automatically.
Jenny
Awesome. We love the automatic. So yeah, we really appreciate you coming on the podcast today to talk about these new funds. And I think you had mentioned before, our main message is that this does happen automatically. There’s really no action required for any of our DCP or Plan 3 folks, but we just like to chat about investment options and let people know what’s going on.
Chris
Well, thank you, Jenny, and thank you Seth. Thank you so much for giving me the opportunity to speak with some of your members today through the podcast. And, we’ve had a long-standing relationship and working relationship with WSIB and DRS, and we’re happy to be a part of it. So, thank you again.
Jenny
Thanks!
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Disclaimer
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References to any specific product or entity do not constitute an endorsement or recommendation. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Views and opinions expressed by DRS employees are those of the employees and do not necessarily reflect the view of DRS or any of its officials.
