Why use a target retirement fund?

03 November 2016 | Portfolio construction


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Help your clients reach their retirement goals with a target retirement fund. Our experts explain how TRFs can help advisers and their clients.

Tania Allerton: Welcome. Target date funds have taken off in the US over the last 15 years or so, but they're not that well known in the UK. I'm Tania Allerton, Business Development Manager at Vanguard. Today, I am speaking with investment strategist Ankul Daga to discuss these funds.

Ankul, what are target date funds?

Ankul Daga: Target date funds, or target retirement funds as we like to call them, simplify retirement investing for advisers and their clients. Investors select the fund which has the target date closest to their year of retirement and then the fund does the job for them. The key distinguishing feature of these funds is their asset allocation. The proportion of equities and bonds held in these funds gradually evolves as the investor approaches retirement and then enters into retirement.

Tania Allerton: Why do they do this?

Ankul Daga: This is done to meet the needs of the investor for different stages of life. When typically investors are relatively young and in the early part of their career, they have a long time horizon and they can take a significant proportion of risk. To reflect this, the target retirement funds hold a large amount of equities and then as the investor approaches retirement, we start reducing some of that equity allocation and moving gradually into fixed income.

Tania Allerton: Those sound a lot like lifestyling funds that would have traditionally been used to help an investor save to buy an annuity at retirement. Is that the case here?

Ankul Daga: Not quite. There is one key difference. These funds are focused to help the investor all the way through retirement, not just to the point of retirement. Now, in the brave new world of pension freedoms, the investor has a number of choices to make. They can take a lump sum, they can spend from their portfolio, or they can buy an annuity. The target retirement funds optimise the choice for the end investor.

Tania Allerton: How would an adviser know if these are suitable for his clients?

Ankul Daga: Each client’s needs are different. We acknowledge that, but when we were designing these funds, we looked at what is the typical age at which people retire in the UK; what is the length of that retirement. And, having considered all of these items, we then decided upon a mix of equities and bonds that evolves over time and then the mix of UK and overseas investments, which are held in these target retirement funds.

Tania Allerton: What are the key advantages to an adviser of using these products?

Ankul Daga: There are three key advantages. Number one is simplicity. Financial planning, just like retirement planning, can be fairly complicated. So we've now got a single fund solution which helps the investors all the way through retirement.

The second piece is that these funds offer what you'd expect from Vanguard. They are broad-based. They are well-diversified. They are strategic and long-term in approach. And then we execute them using low-cost index funds. This way the clients reap most of the benefits and have a better chance of investment success.

Finally, these solutions free up the advisers’ time from asset allocation, investment oversight and fund selection. This allows the advisers to spend more time in nurturing their client relationships and providing valuable advice to their clients.

Tania Allerton: And, of course, this is one of the areas that we identified in Advisers Alpha as where advisers can add real value. Ankul, thank you for explaining target retirement funds.

Ankul Daga: Thanks.



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