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RBC glide path aims to ease Millennials' fears

RBC Global Asset Management Inc. has an unusual asset-allocation strategy for millennials in its newly launched suite of target-date funds.

The normal approach taken by target-date funds for the retirement market is for the equity allocation to start off at its loftiest level and then to be gradually lowered over time as the investor nears retirement. The logic behind this approach is that the longer away you are from retirement, the more you should be able to tolerate the higher volatility associated with equities.

For the most part, that's the approach taken for the RBC Retirement Portfolios announced on Dec. 12, whose underlying assets are proprietary funds in the RBC and PH&N fund families. The target dates for the seven funds-of-funds portfolios -- which are designed to correspond to investors' desired retirement dates -- start at 2020 and range upward in five-year increments to 2050.

It's the longest-dated fund -- RBC Retirement 2050 Portfolio -- that represents a departure from the conventional downward-sloping glide path. This portfolio, designed for millennials who are more than three decades away from retirement, starts off with a target allocation of a relatively modest 50% to equities, with the other half allocated to fixed income and, to a lesser degree, money-market securities.

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But instead of gliding consistently downward, the equity allocation of the 2050 Portfolio will gain altitude. The equity target is 62% by 2020, rising again to 65% by 2025. That level is to be maintained until 2040. After that, the glide path will bring the equity target down to 52% by 2045 and 40% by 2050, the target date.

As RBC GAM explains, the somewhat lower allocation to equities in the initial years of the Retirement 2050 Portfolio is meant to introduce the concept of risk and return to less experienced investors.

RBC's glide-path assumptions are based on an investor who begins investing at age 30 for retirement, wants to retire at 65, and makes regular retirement-savings contributions over 35 years of employment. Real-life individual circumstances, of course, will vary widely.

For millennials who are new to investing, RBC GAM aims to strike a balance between the need for growth and investor tolerance for market volatility. "As investment experience is gained, the investor will be able to tolerate more risk, such that the target equity exposure can be increased to 65% over five years," the prospectus states. "From age 35 to 55, the investor will have a risk tolerance consistent with a target equity exposure of 65%."

RBC GAM's allocations for each of the seven target-date funds assume that the investor will continue to hold the fund for 10 years after retirement. In the case of the Retirement 2050 Portfolio aimed at millennials, the target equity allocation will shrink to 32% by 2055 and 25% by 2060.

By 10 years after retirement, the asset allocation of each of the target-date funds will be similar to that of an eighth new fund, RBC Retirement Income Solution. Mergers are to take place into this fund 10 years after the RBC Retirement Portfolios reach their target dates.

All of the retirement portfolios are available in a no-load Series A; an Advisor Series which has a low-load deferred sales charge for redemptions in two years or less; and Series F for fee-based advisory accounts. In addition, monthly-pay Series T5 and the fee-based Series FT5 are available for the 2020 Portfolio and for the RBC Retirement Income Solution. (See table below for details.)

For the longer-dated portfolios, the management fees are 1.80% for Series A and the Advisor Series, and 0.80% for Series F. Fee reductions take effect five years before the target date. RBC also charges each portfolio an administration fee of 0.05% annually, which covers most expenses. There is no duplication of fees charged by the underlying funds.

RBC Retirement Portfolios – Management fees

Fund

Series F

Series FT5

Series A

Series T5

Advisor
Series

RBC Retirement Income Solution

0.7%

0.7%

1.45%

1.45%

1.45%

RBC Retirement 2020 Portfolio

0.75%

0.75%

1.5%

1.5%

1.5%

RBC Retirement 2025 Portfolio

0.8%

N/A

1.8%

N/A

1.8%

RBC Retirement 2030 Portfolio

0.8%

N/A

1.8%

N/A

1.8%

RBC Retirement 2035 Portfolio

0.8%

N/A

1.8%

N/A

1.8%

RBC Retirement 2040 Portfolio

0.8%

N/A

1.8%

N/A

1.8%

RBC Retirement 2045 Portfolio

0.8%

N/A

1.8%

N/A

1.8%

RBC Retirement 2050 Portfolio

0.8%

N/A

1.8%

N/A

1.8%

Source: RBC Global Asset Management Inc.

The lead manager of the RBC Retirement portfolios is Sarah Riopelle, vice-president and senior portfolio manager, investment solutions. She also oversees the PH&N LifeTime series of target-date funds, which are distributed through discount brokerage channels and through the affiliated mutual-fund dealer PH&N Investment Services.

The PH&N LifeTime funds take a traditional glide-path approach, with their highest equity allocations in the initial years. Another difference with the RBC Retirement funds is that the PH&N LifeTime funds are designed to remain active 25 years past their target date.