Morningstar Advisor - December 2012/January 2013 - (Page 10)

On Topic Why Do You Use Dynamic Funds of Funds? Let us know your thoughts at “In the retirement-plan world, prudently selected target-date funds and managed accounts, along with index funds, are slam dunks to achieve better participant results and provide more fiduciary protection for plan sponsors because: 1 They are broadly diversified, which is an important ERISA mandate. 2 Fees are coming down dramatically due to competition. Reasonable fees are another ERISA mandate. 3 Target-date funds, managed accounts, and target-risk funds are acceptable under the Department of Labor’s new Qualified Default Investment Alternative requirements if they are prudently selected and monitored. A QDIA gives a higher level of fiduciary protection to plan sponsors for participants who do not make an investment election and are “defaulted” into a plan investment. 4 They make investing easy. Pick one fund. This is important in retirement plans where participants tend to make one selection and don’t make another selection for a very long time. 5 Target-date funds and managed accounts 6 Fund families are doing a very good job with portfolio construction. In a past life, I did asset-allocation modeling for ultra-highnet-worth clients. Funds are building portfolios like we would build for the very wealthiest investors.” Stephan Miskjian, CFA, CFP Miskjian Investment Consulting Glendale, CA Quick Poll (given Nov. 12, 390 responses) 1 Which of the following types of dynamic funds of funds have you used for clients? 529 Plans Target-Date Funds ETF Managed Portfolios 63.1% 57.0% 34.8% 2 Are you using dynamic funds-of-funds vehicles more, less, or the same since the 2008–09 financial crisis? More Less Same 35.6% 17.7% 46.7% “I only deal with participant directed 401(k) or 403(b) style retirement plans, and we use the target-date funds as the default funds for the plan. I typically see over 80% of plan assets going into target-date funds. I use target-date funds in the plans I set up for three main reasons: 3 Are you using dynamic funds of funds in conjunction with more-traditional investments in your clients’ portfolios or as stand-alone investing “solutions”? As complements to traditional investments. 46.8% As standalone “solutions.” I don’t use dynamic funds of funds. 27.3% 25.9% 1) They are simple for participants to understand; 2) with their age-based asset allocation, participants are properly allocated and diversified through various asset classes; 3) they become more conservative over time. 4 I use dynamic funds of funds because they allow me to (check all that apply): Outsource complex asset-allocation decisions. 45.0% Charge clients lower fees. Devote more time to other planning issues. Simplify investing process for clients. Answer the demand from clients for “all-weather” investments. 20.5% 29.3% 62.2% 41.8% The disadvantage of the targetdate funds is that one size doesn’t necessarily fit all. Everybody has different ideas on investing, risk tolerances, financial and life situations, so although a particular target-date fund is closest to a participant’s retirement age, it might not be the right allocation for all participants. However, I believe that the advantages of target-date funds in a participant directed 401(k) plan outweigh the disadvantages.” Daniel Rodriguez Carr, Riggs & Ingram Tallahassee, FL generally follow accepted investment recommendations under Modern Portfolio Theory. They use more stocks/less bonds for younger participants and less stocks/more bonds for older participants. They are well diversified. There are issues with some fund families taking too much risk, but there is enough selection out there for plan sponsors to choose what is right for them. 5 I don’t use dynamic funds of funds because (check all that apply): I can do it myself better. Their fees are too high. Their fee structures and strategies are too complex. 53.5% 49.1% 23.9% My clients didn’t hire me to outsource these 46.5% types of decisions. 10 Morningstar Advisor December/January 2013

Table of Contents for the Digital Edition of Morningstar Advisor - December 2012/January 2013

Morningstar Advisor - December2012/January 2013
Letter From the Editor
What Stands Between Me and Stupid
Why Do You Use Dynamic Funds of Funds?
Serving Clients and Community
How to Pick an ETF Managed Portfolio Strategy
Tactical View of Risk
Investments á la Carte
Investment Briefs
Unbundling ETF Managed Portfolios
Risks Loom Over Telecom Industry
Outsourcing Asset Allocation
ETF Managed Portfolios on the Rise
Age-Based Options Take Over 529 Industry
How the Landscape for Advisors Is Changing
Mark Egan Embraces Volatility
Alpha, Beta, and Now … Gamma
Performance Gaps
Gains in Momentum
Companies Where Management Teams Add Value
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
The Once and Future King

Morningstar Advisor - December 2012/January 2013