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Retirement Planning: Looking for help from Insurance? March 2, 2009

Posted by retirementwithaplan in retirement.
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030209_crslneCrossing the line from insurer to financial adviser is tricky. You have the customer base, some of whom are there because they seek comfort in knowing that they are insured against lose, sometimes catastrophic. Insurance companies have tapped this base of clients most glaringly with the invention of the annuity. (Those who have followed my work over the year know how I feel about these products.) But this is not about that particular part-insurance, part mutual fund all wrong type of investment. It is about a foray into the retirement world via a direct mutual fund that gained popularity with its inclusion in the Pension Protection Act of 2006.

That act named the target-dated mutual fund or lifestyle fund as the preferred choice for those who did not initially sign up for their defined contribution plan at work. This piece of legislation thrilled Wall Street although the celebration was muted. Perhaps they didn’t want to publicly revel in the expansion of potential investable dollars.

Target dated funds also have a sore spot in my writing. Designed to be a hands-off approach to retirement investing, allow the fund manager to make the necessary, age-wise adjustment that many on Wall Street and Congress felt was not being done on time, if properly. The investor would simply pick a potential retirement year and the fund would do the rest, essentially becoming more conservative as time went on, creeping ever closer to the target.

But if this were the case, why did so many folks so close to their target date loss so much (in some cases, almost 20% of what should have been a ultra-conservative investment portfolio) as the stock market declined and continues to do so? And why would folks who lost so much outside of these funds rush for them as a salve for the losses?

If the recent actions of Allstate are any indication, they should not have even been invested in these funds. Allstate, the insurance giant recently pulled the plug on its efforts to tap this lucrative market by eliminating its offering of target dated funds called ClearTarget. Although the company gave no reasons for the action, we can make a few logical guesses as to why.

Many target-dated funds exists as mutual fund dumping grounds. Stellar funds, whose performance is underwritten by large shareholder bases often exist on their own. But some funds, more narrowly focused and often undersubscribed to by investors find themselves on the brink of closing. These funds find new life in target-dated funds as holdings for the asset allocation manager. This fact alone makes the idea of trusting your mutual fund family (not so much the manager of these funds, often a name on a desk and not much more) for keeping what would otherwise be jettisoned as dead, alive inside something advertised as something else.

Unlike mutual fund families, insurance companies, which tend to have far fewer in-house funds under management, often do not have the same luxury of deception. And Allstate, who has cut their dividend, laid off thousands of workers and has recently reported that many insured motorists are trimming coverage or allowing coverage to laspe altogether, did what any financial giant should do in such a situation, dropped their offering which came on line in May of 2008.

This may be the the first admittance of unacceptable risk from a company whose job it would be to actuarialize it. Could this be worth noting?

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