New research by Russell Investment Group has determined that investors, particularly defined contribution participants, can benefit from more aggressive asset allocation in the early years of saving and investing for retirement. As a result, Russell Investments Canada Ltd. announced that it is changing the target asset allocation in its LifePoints Target Date Portfolio series.

The series feature three portfolio options: LifePoints 2010 Portfolio, LifePoints 2020 Portfolio, and LifePoints 2030 Portfolio.

Investors make just one decision based on the anticipated date of when they require the funds, and contribute to that portfolio for their entire investment period. Each portfolio is strategically diversified and will gradually become more conservative until it reaches its target date. The asset mix at maturity of all three LifePoints Target Date Portfolios will be 64% fixed income and 36% equity.

“Russell’s target date funds are designed to help overcome the uncertainty and confusion that many find on the way to financial security,” said Sadiq Adatia, who is responsible for the management of Russell’s target date funds. “Starting early and continuously investing is a critical factor when it comes to achieving retirement goals. The evolution of the equity/fixed income mix over time is the most important factor in determining the risk-and-return nature of these funds. As such, it is critical that defined contribution plan sponsors should understand the assumptions behind a fund’s glide path. Otherwise, they may be buying a retirement savings black box that may be inappropriate for them.”

A recent study, called Russell’s Approach to Target Date Funds: Building a Simple and Powerful Solution to Retirement Savings, by Dr. Grant W. Gardner, Russell’s senior balanced fund strategist and Yuan-An Fan, Russell’s senior research analyst, presents a method for constructing what Russell believes is the optimal “glide path” for a target date fund.

The glide path is the evolution of the mix of equities and fixed income over the life of the fund. Russell’s glide path is designed to meet the needs of a typical defined contribution participant, taking into account current income levels, projected future income growth, retirement contribution rates and retirement income needs. The typical participant has the goal of building enough wealth at retirement to maintain his or her pre-retirement standard of living.

Russell’s glide path is specifically designed to manage the risk of failure in achieving the goal of replacing 50% of pre-retirement income. Based on Russell’s assumptions and this research, this glide path is optimal in the sense that it meets the needs of the typical participant better than other glide paths compared in the study.

The research finds that typical participants can tolerate the risk of a high-equity portfolio in earlier years when they have many years of future savings available to offset investment losses. In contrast, a more conservative portfolio with the majority of assets held in fixed income is more appropriate in the final few years before retirement as well as after retirement.

“With these changes, we responded to the needs of plan sponsors and utilized Russell’s ongoing research into investor behaviour. We believe the new allocations provide shareholders of our LifePoints Target Date portfolios with an improved opportunity to meet the goal of building an adequate retirement portfolio,” said Becky West, Russell Investments Canada Ltd.’s director of retirement services.

For a complete list of the allocation changes to each LifePoints Target Date Portfolio, please see the attached news release.