CONTRIBUTORS
Brett Goldstein, CFA
Head of US Retirement Portfolio Management
Franklin Templeton Investment Solutions
Jonathan Schreiber, CFA
Solutions Portfolio Manager
Franklin Templeton Investment Solutions
Executive summary
- Some target-date managers are allocating to an account held at the recordkeeper, typically referred to as a general account, to deliver shared economics that may help reduce plan recordkeeping costs. This raises the question on the part of the manager of the target-date series about how best to integrate this allocation.
- In our view, replacing cash with a general account is impractical and would increase credit risk. We believe utilizing fixed income lowers expected return and could increase the overall portfolio’s correlation to equities during market selloffs.
- On the other hand, we believe sourcing a general account allocation from equities comes without these drawbacks, and with the ability to replicate the original series’ risk profile and asset-class exposures with equity derivatives.
General Account: proprietary account of an insurance company affiliated with the recordkeeper in which it manages its own funds; typically invested in fixed income and cash.
Target date funds have become a popular option in employer sponsored retirement plans; since professional managers actively make asset allocation changes as time passes, investors enjoy the straightforward approach that target date funds allow. Some managers of these series have been partially allocating funds to the General Account (GA) of a plan’s record keeper. Dubbed ”co-manufactured” target date series, these are currently being offered as the qualified default investment alternative (QDIA) in employer-sponsored retirement plans.
The reason behind this shift is simple – record keepers incur costs that must be charged back to the employer sponsoring the retirement plan. Allocating to the record keeper’s GA results in shared economics that can be passed back to the plan sponsor and help offset these costs.
As co-manufactured are utilized among plan sponsors, managers of target date series are presented with a question – “what is the best way to allocate to a record keeper’s GA without sacrificing liquidity and return potential, or increasing risk?”
In this paper, we critically examine the respective merits of various approaches to including GA as a new allocation within target date series.
To request the offering document call (800) DIAL BEN/351-5236. The offering document includes investment objective, risks, charges, expenses and other information that you should read and consider carefully before investing.
WHAT ARE THE RISKS?
Past performance is not a guarantee of future results.
The funds are collective trusts managed and distributed by Putnam Fiduciary Trust Company, LLC (”PFTC”), a non-depository New Hampshire trust company. However, it is not FDIC insured; is not a deposit or other obligation of, and is not guaranteed by, PFTC or any of its affiliates. The fund is not a mutual fund registered under the Investment Company Act of 1940, and its units are not registered under the Securities Act of 1933. The fund is only available for investment by eligible, qualified retirement plan trusts, as defined in the declaration of trust and participation agreement.
Each Retirement Advantage Fund has a different target date indicating when the fund’s investors expect to retire and begin withdrawing assets from their account, typically at retirement. The dates range from 2025 to 2065 in five-year intervals, with the exception of the Maturity Fund, which is designed for investors at or near retirement. The funds are generally weighted more heavily toward more aggressive, higher-risk investments when the target date of the fund is far off, and more conservative, lower-risk investments when the target date of the fund is near. This means that both the risk of your investment and your potential return are reduced as the target date of the particular fund approaches, although there can be no assurance that any one fund will have less risk or more reward than any other fund. The principal value of the funds is not guaranteed at any time, including the target date.
Consider these Risks before investing:
All investments involve risks, including possible loss of principal. Derivative instruments can be illiquid, may disproportionately increase losses, and have a potentially large impact on performance.
Investments in underlying funds are subject to the same risks as, and indirectly bear the fees and expenses of, the underlying funds. The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results. The investment style may become out of favour, which may have a negative impact on performance. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity, and possibility of default. Asset-backed, mortgage-backed or mortgage-related securities are subject to prepayment and extension risks. International investments are subject to special risks, including currency fluctuations and social, economic, and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Real estate investment trusts (REITs) are closely linked to the performance of the real estate markets. REITs are subject to illiquidity, credit and interest rate risks, and risks associated with small- and mid-cap investments. Convertible securities are subject to the risks of stocks when the underlying stock price is high relative to the conversion price and debt securities when the underlying stock price is low relative to the conversion price. Active management does not ensure gains or protect against market declines. These and other risks are discussed in the fund’s prospectus.
©2024 Franklin Templeton. Putnam Fiduciary Trust Company and Putnam Investments are Franklin Templeton companies. Securities offered by Franklin Distributors LLC. Putnam funds are not exchangeable for other funds distributed by Franklin Distributors, LLC.